chairman conyers has indicated. it was not easy for dr. king and it was not easy for all people involved. so when we talk about a celebration, it is important to keep all that serious this in perspective. .

it was bad moral vision about human nature and the kind of society that we should have in this nation that had led him toward the civil rights movement and to be an advocate. the movement itself came about because there was the need to address the problem of racism and discrimination as it concerned average americans and others, and he played an important role in that. dr. greene has many of their faces. there was the civil rights dr. king, but there was the anti-war

dr. king. there was the poor people's march dr. king. those were somewhat different generations of what he did, but this singular guiding vision was his moral review of the world and the fact that we should always continue working on making this a more perfect union. another emperor natcher. is that he was an intellectual. he was a philosopher. he was a well-studied person. we know that he was a ph.d., but his learning and his insight certainly went beyond the academics. the boat. he was a critical thinker. he reflected on life. by the time he comes to the movement, all of which he was studied, all the meaning of his life, and those that influenced him, black and non-black, professors and non-professors, those folks that shaped his view of the world. so now you are having a person

who is now leading a movement whose leading to get lines and boycotts and giving speeches who actually is a very, very deep- seated, insightful and fluctuate -- intellectual about human nature. if you began to read some of the books on dr. king, you'll understand how much he devoted to studying and thinking constantly throughout his life about the meaning of human nature, about issues of power and power struggles and what those concept man and the ideas that are relevant to them meant. he was also a great political and social strategist. you had to be to guide a very complex movement. the chairman noted that there was not unanimity, even in the african-american community, about tactics and strategies and the things that dr. king did. he went into birmingham and local communities did not want him there. they thought he was grandstanding, seeking

attention. so when you begin to understand all of this debacle is, i think then you begin to appreciate his many sacrifices. because by the time dr. king comes along and the movement had already begun. you could say the movement had begun when the first resistance came from the slaves and the rhythm kept going. but the litigation aspect of the civil rights movement began in the early century after the formation of the naacp. you had the brown decision as if we cannot give up the authority of a lot to racial discrimination. so the decision was made. but now, you're in a position where you're challenging the most powerful organizing force in american society. it is class, culture, the role of gender, everything is

organized around this issue, and now you are saying you have to be constructed. well, the face of the movement that dr. king led was that we need to start this deconstruction now. we need to implement the changes now. gradualism will not work. we will be here in 1980 and 2010 is still talking about this. and it took a lot of effort to make that happen. but you have to be wise in political and social strategy to make it happen. when you start reading some of the planning that went on in and the strategic maneuvering to make this happen, you really begin to understand that the people involved were all very bright people. from lawyers like cameron congress and others, who all contributed to the success of the strategy is that brought about all of the legislation that we recognize there

recognizing dr. king. he clearly was a great leader because he had to manage the tensions internally within the movement but also the resistance in larger society. and to guide the president and political leaders but also persons within the average american community toward the goal, making them believe that this could actually happen. but all of that to another important attribute that we, i think, sometimes dismiss are not taken as seriously. it took a lot of courage. from the moment dr. king started the montgomery bus movement, he knew his life was on the line. his house had been bombed. from then on, he knew he was a target. he knew that in the. he could sacrifices life, but most significantly, he always had a chance to back out. he could have claimed success on the montgomery bus boycott. it was a success.

he could've walked away in could have become a lot of things. it could god into business or gone into teaching. he could've done a lot of things probably to make it easier, but he chose not to do that. he chose to put himself at risk. when you read about him going to places and there is tension about him coming in, understand, he is going to put himself on the line. he knew that when he is walking as the leader, he is the target. he did not need bodyguards around one that was happening. the non-violent movement has also been described as a passive movement. it was anything but passivity. when one puts one's self, lays one body out to resist a force of hatred or oppression and purposefully put someone's body up for resistance, that is not passivity. that is very aggressive.

it is physically present and even more so morally aggressive. it was that moral aggression that got in the work of dr. king, and he is a symbol of all of the others to really sacrificed themselves, men and women, black and non-black, to make the movement of success. and of these are just some of the reasons. we could go on but do not have time to cover all the attributes of a complex person like dr. king. we would not do justice. but i think those are seven important characteristics that we should keep in mind when we're speaking of dr. king and why we should never do anything to in any way minimize or trivialize his work for the movement. and because of the impact that the movement in the movements that he led had on our society then and now, a celebration is

certainly in order. but i would like to close by saying, so what is the celebration? a celebration is easy. we go every year and show up for dr. king programs. it could talk about it in school. you can write your research reports. you can say, i support the holiday. and if their continuing efforts to implement at the local level, you can support that. that is fine. and we should continue doing that. but at the end of the day, the purpose of this holiday is to make sure that we continue to reflect on why we needed the civil rights movement, a poor people's campaign. what we have a first amendment to allow people the right to speak out in america. why do we need people of courage. sometimes people to sacrifice their lives, whether those in the midst of board today were those who sacrificed their lives

in america through other causes. why sometimes those things are necessary for us to have the comforts of sitting here today and having this discussion. so when whitney talk about dr. king, it is important to reflect on all of those issues, why we needed it, why we needed such a sacrifice then and why we need even more sacrifices today. so i will leave with this proposition. all of us obviously have to adhere to it, but i especially challenge those of the next generation that are in the audience. the issue is, yes, we're honoring dr. king. but i think what is even more significant from where we stand today is to give proper honor. the proper honor to days to question what movement are you going to be a part of? what movement are you going to lead? we are beset in this country in this world with as many problems

that existed then, and they need to be resolved. often when you look in history, problems are resolved through movements, persistent efforts by groups and individuals to change the social structures of society. and there is still a need for that. the question is, in looking back at dr. king as the example and looking back at his life and work and all of that which he represents, all of the individuals that he represents an and bodies, what lessons can i learn from that as i now begin my movement in joining in supporting and leading? thank you very much. [applause] >> thank you. i am going to exercise the product of the chair and ask one question that has puzzled me a little bit, but i think he has helped explain it a little bit more today.

in 1979, you met with failure when an amendment came along to change this to send a holiday, so the bill was withdrawn. another congress and by and in 1983, you mentioned that you were able to strike an agreement with some republicans, and you did at more participation in debates and so on. but i was not aware that there was at least some kind of tacit agreement that the president would sign the ability of the passage in both houses. it was just the fact that you had a veto-proof majority in both houses the brought ronald reagan are round or did you understand from the beginning that he was going to eventually sign the bill if you succeeded in passing that? and why did the last moment when you're about to achieve decree were you willing to hand the software freshman member of the congressional black caucus and not carry it through yourself? was it that she was in danger politically or what was the strategic part in doing that?

>> i am going to make this kind of brief. thank you very much. what developed in addition to the sunday idea was the notion that we ought to put all future holidays on a monday. and the reason is that for collective bargaining and economic purposes, it is very difficult to have january 15, which would come on a different day of the week every year, and i was psychologically against that. and we finally had a showdown where they said it is going to be on the 15th. it will be on the third monday

in not the 15th. finally, coretta scott king had to come up. we were in the back room of voting on it. they wanted me to vote for that, and she pleaded with me. she said, john, we are not going to get the bill if we do not go along with a monday. that all of these holidays that might be added, they are all being abrogated in that way. so that is what happened. end cady hall was on the committee that had the jurisdiction of the holiday bill, so they said, let's do it with her. i said, that is fine. i campaigned for her. i knew her well. and dick had sure -- and we knew where she came from. that is how that all happened.

if i could add one other, our discussion. first of all, i would like to think the doctor from the woodrow wilson center for being here throughout this entire hearing. i know she has a lot of events here, and this is very impressive to me. let's give her a round of applause. [applause] you know, we have done some excellent calls to rihanna address ourselves, motivate ourselves -- to reenergize ourselves and motivate ourselves. in the last three speakers made me make this suggestion to you. and that is that king is one of

the most unusually gifted people of all time. here was a person that began as the minister, but it was his philosophy, his politics, his understanding of economics and legal justice that really superseded his original calling. his father was a minister, and he was naturally destined to be a minister. but dr. king had an insight that transcended his religious

convictions, although it is my belief that by being a minister, that gave them an additional, very important base upon which to move out into all these other religions, all these other activities. there was one thing about dr. king that i want to share with you. it is a very interesting celebration and memorial that we're having here the woodrow wilson center. king never challenged anybody is religious conviction or did he use it as a test or did he try to win people over to his religious persuasion. never. he would tell you what his was, and he was, of course, supreme as a religious advocate, but it

never had anything to do -- he did not know and made no big deal of what you're religious conviction was or what it was not. all he wanted you to do was to come into the struggle, and that gets me to the point that i am making. it is that he had a world view of these issues that did more than tried to make you join in the movement or get more active or vote. what he was doing was trying to give you another view of where we are in a local but world

history. he was a global list. -- he was a globalist. you see, he had an international view. and everything is local. all of us that the community and a family and a city and an asian. and king had that, no question about it. his last act, the poor people's march. but beneath all of this, and when you reach as parts of them -- read parts of him and how fortunate i was to know him, work with them, meet with them privately. and belefonte and all those people that surrounded him. i mean, i keep thinking that i

am one of the most fortunate people on the planet. i am the only person he ever endorsed for political office. and that was not a small importance because having never run for any office before, i won my first contest by 128 votes. and that was with rosa parks having come to detroit from montgomery to join my campaign. and this the king influence -- i would be practicing law or maybe a judge or something. but i had no idea that would be -- that this would come back to

me to send me to become the first african-american chairman of the most powerful committee in the congress, the house judiciary committee. impeachments, the constitution, the federal criminal law, immigration, federal criminal rules -- all of these matters, copyright, patent, trademark. and so, what king was really working on when he gets to beyond this first level is to think and see the world from a different perspective. and i learned so much, and i traced it all back to king. to understand the economic

system, to understand how america controls many parts of the world by taking on one economy at a time, by the incredible power that this nation has to influence everything. we have corporations that have more power and influence than half the countries on earth. and when you begin to realize what king was really working on, he was trying to get us to understand this economic system. and now, after these years in the congress, i have began to see the said standing on his

shoulders and all those people better celebrated better celebratedking and remember, -- celebrated along with king and remembered. many we did not even know their names. they died or were big group did or incarcerated. or suffered or paid huge prices. i was never in life-threatening circumstances. and yet, every day king woke up, he was more worried about his family, and they'll never let him stop worrying about that. he was more worried about his family being destroyed then he was. he knew he was a target. but he kept saying, what about my family?

and so the understanding, king, you have to really think about that he dared talk about not changing the american system, he was talking about changing the world. he was talking about the fact that there are more people -- the world is divided into the luckiest ones in this country. then you have the developing nations, the poor, and then you have the poorer. i mean, when you're making $2 a day average, living in terrible conditions where every day is a threat to, or you cannot get

water to drink that will not eventually take your life, where you are exploited the beyond imagination by forces that you for a delay did not even understand. and then you have the poorer. the poor is one problem. the poorer live at $1 a day or less. they're struggling to get to be just fopoor. they're living under the worst circumstances. and king had this world view that does not come to you all at once. oh, yes, the oratory was magnificent. incomparable. but that was not the whole story.

it is in his riding and in the growth and maturity of dr. king. i used to wonder why he had not opposed the vietnam war earlier. i was against the war, but king knew because they told them to stay out of foreign policy matters. you know nothing about this. and he was told that if you come out against this war and tried to act like you know something about foreign policy, you will be destroyed. and that is why he took what seemed so long to those of us that were opposing the war, and it was true. when he came out after he made

that speech at the church, what was it, riverside church in new york? he went off the paper. "new york times" turned and all the media that would credit him for his great work and raise relations, they said, no more for you, buddy. you are persona non grata. you have now stepped across this line. and so the excellent presentations of this panel moved me to want to add that comment. thank you. [applause] >> thank you. we have time for a couple questions. let me remind you that afterwards we will have a reception sponsored by the congressional black caucus foundation in the border across the hall. you're all invited and encouraged to come and keep the conversation going.

>> i am is senior scholar here at the wilson center. in 1965-66, i was a field worker for the southern christian leadership conference. mostly in alabama and southern mississippi. there is a lot like to say, but since we're not supposed to make speeches, i will ask a question. i want to ask about shirley chisholm, one of my favorite people. i heard you mention are aware that she had a part and the passage of this act and the development of the day. i would appreciate if you elaborate on said more -- on that more. >> she was a very unique member of the congress. and a real bad ttler and one of the first women to run for president, and of course, one of

the black candidates for president secy in the mold of je jackson, herself, and reverend al sharpton. and she was very strong in the support of martin luther king, the whole holiday bill. she was a teacher and was on the education and labor committee. and her help was a very important to, and her voice was heard across the country, not just in new york. >> let me add something, i had the pleasure to know shirley chisholm from the rules committee. i was on the staff, and she was

placed on that committee. she sometimes would, and the rules committee had leadership, but sometimes she would but her own leadership. i would ask why, and she would say sometimes you've got to do what you have got to do. other times she would go along with them. the issue is a very courageous woman overall. i remember when she first came to congress, they put her on the ag committee and i did not know why because she was from new york city. she ended up fighting a good fight for new food stamp money. so she found she could be helpful on that committee, and she was a hard fighter. >> i know she was one of the founders of the national congress of black women which was an organization founded by tucker and others who actually strive and still continue to strive to get more african- american women in politics. she was a hero i think among women in this country, african- american and others.

you talk about oratory, when she spoke, you listened. >> we have time for one more question. the congressman has to catch a plane. but stich the front row here. -- let's take the front row here. >> during the years of gathering support for this holy day, how did the religious world, particularly the black christian church, respondent play our role in making this happen? the national baptists, who in no split partly over differences in the text of those -- the tactics of the civil rights movements in lot -- and martin luther king, jr., were the support of our were they not the player in the support for the holiday? >> my limited knowledge of that was that -- i think dr. king, when there was a group of the national baptists that split in

created the aggressive national baptist. they were younger, more aggressive, more forward- thinking. there were mostly from around the south but from all over the country in support of the making of a holiday as fur. as far as the national baptists are concerned, i am not sure. >> we have to bring this to a close. please join me in thanking congressman conyers and the rest of the panel. [applause]

>> here is what is ahead on this martin luther king, jr., a day. next, the latest update on relief efforts in haiti. then more from a recent series of hearings looking at the financial crisis. >> join us later today for live coverage of new virginia gov. bob mcdonnell in his first state of the commonwealth address. that will be a 7:00 p.m. eastern here on c-span. tonight, head of the

communications workers of america on what the federal government's role should be in expanding high-speed internet in the u.s. that is tonight on c-span2. >> looking now the latest pictures of relief and devastation and rescue efforts in haiti. from the ap, more u.s. troops, doctors, and aid workers are heading into 80 to help the thousands of earthquake victims. there's a long line of u.s. citizens at the u.s. embassy at port-au-prince hoping to arrange a flight of the of the country. looting has spread. people spotted breaking into shops. taking toothpaste among other items. people put it under their noses to block the smell of decaying bodies.

>> a live? did you speak to them? >> i do not know. i heard them. >> when was the last time? >> 36 hours to 48 hours. >> what was it, a voice or tapping? >> tapping. >> do you know what direction? >> ok, to your right to. >> one that way, one that way.

>> again, search and rescue teams finding a survivor taken from the u.n. compound in haiti. a portion and now out of a briefing from earlier today in port-au-prince, the capital of haiti, with the head of the u.s. embassy in haiti and the commander of u.s. military forces carrying out earthquake release efforts. due to technical problems, we are only able to show you about 20 minutes of this event. >> we are all sharing one microphone. the easiest would be if you have any questions for me about the role of the american embassy, if you have questions about our coordination with the government of haiti, the priorities that have been established by the government of haiti. if you have questions about our relationship with the international community or the united states ngo's working here in the country, would be glad to

answer those questions. the general will be glad to answer questions about how the food is being delivered. how the military is performing in with their footprint is. we're glad to take any other questions, obviously. >> would you say getting american citizens out of haiti is an equal priority to helping haitians? >> that is correct. we of three equal priorities. one is rescue and recovery. many teams are working on the ground. one is getting our citizens back to the united states. the other is delivering assistance and supplies. their three jobs that have to be done concurrently. we cannot do one without doing the other. >> [inaudible] >> [inaudible] we are helping the haitian people. we're deeply engaged in that. we are expanding far more resources on providing

assistance to the haitian people than on the other two priorities. but those have to go ahead. we cannot leave people, particularly on the rest and recovery, there is a limited timeframe in which we are able to get people out alive. we simply cannot delay it in order to do other things. >> [inaudible] why is this such a military operation? >> president's preval asked us to the beginning -- from the beginning to come in with all the assistance we can. we have the ability to do the job right then. the united states military has a great deal of experience. they have a great deal of experience in haiti. the military has resources that would take days to mobilize from other organizations. so the u.s. military was brought in at the request of the haitian government early on because they have the means to respond to this crisis in a way that other

agencies do not have immediate means to respond. i think you have seen that there more civilian flights coming in and more coast guard flights coming in. there's more involvement by officers and bike usaid. the civilian footprint is growing, but the u.s. military has a unique role that nine of the other agencies in the united states government have. >> [inaudible] >> as you know, there are several mobile hospitals sitting with the damage. they're ready to go to areas. several journalists -- [inaudible] the people who run these are told day after day the the hospital is coming tomorrow. yet it does not happen. [inaudible]

what is going on here? >> we will address the security issue in a minute. but briefly, i will take a couple more questions and pass it over to the general. some of these things are getting up. you have probably seen them behind the palace. we were able to get the team in there yesterday. some of those teams are providing assistance at the embassy. when a gun amputations and surgery at the embassy. those teams are getting out. they're not getting out as broadly as we would like because of some security concerns. but those teams are being used in being used now. the general will address the security issue in just a minute. whether other questions on coordination with the local government? >> there has been criticism from people in haiti, saying they do not see the government in do not

feel they're doing anything to help. do you have any idea when the government will appear? >> let me say that from the very beginning, right after this earthquake, the government of haiti began taking responsibility for the search and rescue and for the recovery effort. within hours of the earthquake, even when the roads were still all blocked, three different ministers of the haitian government gone on motorcycles and came up to the ambassador's residence to be with them the very night of their of greg, to begin discussions on how the united states could play a role in providing assistance to haiti. the very first night, the ambassador was able to get through to president preval, despite the fact that all the phones were down, and he reached out to him to say, how can we work together to address this situation? the haitian government immediately set up, over here near the airport at a police station, the location were

donors could start meeting, recognizing that our phones would not work. we would have to have face-to- face meetings. the haitian government, under the leadership of the prime minister, met every morning. they met this morning with foreign assistance in players and several ministers of the government of haiti to coordinate relief activities. president preval has been to a majority of those meetings. at been to a number of them, and he has always been there. so the government has been actively involved since the beginning of their earthquake in coordinating with the use of donors and liaising with the un peacekeeping mission. it has been the haitian government from the very beginning that has told us, here are our priorities in addressing the needs that have arisen as a result of this earthquake. >> [inaudible]

>> the loss of our colleagues from the united nations was a very serious one for all of us. the u.n., however, brought in a very experienced diplomat. he has been here before as the representative of the secretary general of the un. he knows heydey well and knows the un system here well. he was able to hit the ground running. the ambassador has all of the skills to get to minusta back up on its feet again and to ensure that the u.n. mission here does not lose a minute in responding to the crisis. we meet with secretary general's, representatives. we met with some twice

yesterday. we will need a couple times a day. the un lost many of their civilians. they lost a number of their peacekeeping soldiers as well. the brazilian troops that are laboring here heroically lost 15 troops and have many injuries. other battalions have lost a lot of troops. but the u.n. is there. you see them out on the streets. the un is providing security. minusta civilian leadership which provide such as support for the government in haiti and is there and active and present. and the leadership that they brought in is an experienced leadership knows exactly what to do here in haiti. let me pass this not to the general who will address the issues of what we're doing to provide assistance here in haiti.

>> good morning. i am lieutenant general ken keen, deputy commander for u.s. southern command. i would like to reiterate and express our appreciation for the international community and for all of you for being here this morning. i want to start by saying that we're here at the request of the government of haiti. and we're working in partnership with the un forces. and minusta. we're doing that on a daily basis and coordinating extremely closely. i have known the commander of minusta for nearly 25 years. we worked together various times. they're doing an extremely

exceptional job in securing of their mission at this time, and we're working very closely with them. under very difficult circumstances. at sea know, the tragic effects of the earthquake are widespread throughout the city. and there were impacted directly as a result of that. that was here the night of the earthquake with the ambassador. as soon as we could, i made my way at first light down to the un forces headquarters to try to link up with them. i was able to locate the chief of staff of the minusta headquarters and got an eye is on the impact it had on their headquarters. so we are honored to be able to work with them, and each day i meet with the general to discuss what they are doing and also share information about what we're doing.

we are forming in he monetary coordination center at the request and approval of president preval and the secretary general. and at this center we will increasingly be accorded in synchronize all of our activities to insure that we're able to the humanitarian assistance where it needs to be as quickly as possible. with respect to the security situation, my assessment of the security situation is is calm at this time. as you have reported, there are incidents of violence. those who live and work here in haiti who have been here for years, both on the embassy and the other international community as well and minusta forces still meet the level of violence we see right now is below the pre-earthquake levels.

nevertheless, any incidents of violence and. our ability to deliver humanitarian assistance, and we have to address those as minusta is doing to the best of their ability. we're focused on delivering humanitarian assistance supplies. yesterday was a very good day. yesterday, we took charge of one of four distribution points. the government of haiti has designated four distribution points. we are running one of those. we have passed out water and medical supplies all day long as long as we had supply is at that location. minusta had the other three. we're coordinating in working with their general to take responsibility of those other three so he can focus those forces that he has dedicated to

that task right now in the area of security. we're going to focus on the area of humanitarian assistance and tried to expand our reach out into all those locations that you have so well reported on that are not getting support at this time. but every day we increase our capability is to reach out. right now, we're principally doing it by the helicopters that you see. they're coming off of the uss delat aircraft carrier. we will increase our footprint that we have here today. we have about 1700 u.s. military. we will see that grow over the cup -- in the coming days. right now, we have approximately 5000. those others are operating from the ship's in support of the operations here. i anticipate within the next few weeks, we're forced to go to

2000 of which only about 50% will actually be on ground in haiti. the rest for delivering humanitarian assistance. the others will be operating from our ships in order to support our operations here. again, trying to deliver humanitarian assistance and supplies as best we can in conjunction with the minusta forces lows the international community. we are only one part of this. the international community plays a critical role as well as countries such as canada which is brought in forces and will be supporting an area that we have not reached yet. we're very appreciative to partner with each one of those. it truly is a partnership with us trying to focus our efforts in the area of humanitarian assistance which allows minusta to continue the great job and have done for so many years in the area of security and stability. >> [inaudible]

is this a sign that the u.s. will be taking over the aid effort in coordination? >> no, we are in support of the government of haiti and the united nations as it relates to humanitarian assistance. what we want to do is use our resources as best we can to enable the humanitarian assistance supplies to get out to the areas i indicated. the formation of a humanitarian coordination center where we all will be part of but it will be shared, if you look, by the government of haiti, and we will take our directions on parties based upon what they are designated. we will execute those as those priorities are set. and we're working in partnership with the minister forces. obviously, enabling them to

continue their job of security and stability while we are able to do that. the more we can do and humanitarian assistance, the less resources they have to dedicate in that area which would take away from their ability to do that. i met with the general on a daily basis. what he is doing in that area is what is necessary in my view. he has forces throughout the country. he has taken measures to ensure that he is able to continue his role in the security and stability, and what i see is that his ability to exercise that as he has done in the past is going very well. >> [inaudible] what is your response to complaints of the u.s. control of the flights coming into this report has prevented some of those eight relief flights from getting in? and why do you have so many

trips on the ground if there is no double [inaudible] ->> as i said, we need as many troops on the ground as we can. we have identified those numbers, based upon our assessment, are trying to reach. there is over 3.5 million people here. it is a very congested area. in order to get to all the points that is needed to address the situation, we need a number of troops to do that. >> [inaudible] >> that is what we have. that it was available immediately. in order to react immediately, we had that capability, not just the u.s. but also canada and the other international communities. in fact, minusta changed many of the resources that were dedicated for security and stability to humanitarian assistance. that was was needed. but the change their focus to

what they were doing with the needed to do following the year earthquake. and they were, as you know, affected by the earthquake. so we're trying to do that to allow them and to have the resources dedicated to them. >> you're watching c-span, created by the nation's cable companies and presented as a public service. here's what is ahead on this morning luther king, jr., a day. next, more from a series of hearings looking at the financial crisis. then another update on haiti relief efforts. later, a discussion on a violent extremism. >> join us later today for live coverage of the new virginia governor's first state of the commonwealth address. we will have that for use

starting at 7:00 p.m. eastern here on c-span. tonight, larry cohen, head of the communication workers of america on what the federal government's role should be on expanding high-speed internet in the u.s.. tonight c-span2 on. >> do you know that one of the top 3 news evocations for your iphone is c-span radio? now you can be quick and easy access to freeze. -- streaming audio channels. c-span radio, c-span, c-span2 and. there is a pad -- tab with links to all of our podcast. it is all free and available from the application store. >> now a portion of a recent public hearing by the financial crisis inquiry commission. witnesses include attorney general eric colder and financial industry regulators. the commission is made up of six democrats and four republicans. it is good will to deliver a final report by december 15 of

this year. the california treasurer chairs the commission. former house ways and means committee chairman bill thomas, of california is co-chair. this portion is about two and a half hours. >> good morning. the commission will come to order. welcome to our second day of public hearings. on the causes of the financial economic crisis better gripping this country. as said as it as the vice chairman indicated yesterday, we are a panel that is going to do our level best on behalf of the american people to try to discern the facts and the causes of the current crisis, which has affected so many million americans. yesterday we heard from a range of experts and people from the

private sector. today, we have a number of people with us who read the federal, state, and local levels who have been involved in grappling with the consequences of this crisis. and i am looking forward to today's testimony. i want to thank the commissioners for all their hard work yesterday and what we do today. i want to thank people in the audience and those watching the hearing as those witnesses that will provide testimony to us. mr. thomas, do you want to make any opening comments? >> i would only like to say thank you very much for appearing before us. we look forward to continued cooperation. thank you. >> and the first panel, we have before us the attorney general of the united states, ms. holder. we have the assistant attorney

general in charge of the criminal division of the department of justice. we have sheila bair, chair of the fdic. and mary schapiro, chair of the sec. we will start with all witnesses as has been and will be our custom at this commission, we will swear all witnesses. i would like to ask all the witnesses to please stand and be sworn before us. do you solemnly swear or affirm under the penalty of perjury that the testimony you're about to provide the commission will be the truth, the whole truth, and nothing but the truth to the best of your knowledge? thank you very, very much. we will now commands. i will ask that each witness provide an opening statement. we do have written testimony from of the witnesses. and i would like to ask if each witness would provide up to 10 minutes of oral testimony. it is my understanding that mr.

holder will provide testimony for the department of justice. i will also note that mr. holder rearranged his schedule to be here and will be with us for the opening statement in a couple of brief questions. i know his schedule dictates that he has to depart. so let's start with mr. holder and then go to sheila bair and mary schapiro. >> thank you. thank you for inviting me to address you and the other distinguished members of this commission. this inaugural hearings, i believe, market critical step forward in better understanding the causes of the financial crisis that have held our economy the best script over the last two years. i appreciate the opportunity to produce paid in the commission's work and to assist in your inquiry. this morning, i am joined by the assistant attorney general of the justice department's criminal division. he spearheads many of our key

efforts in investigating, prosecuting, and punishing financial crimes. he has submitted written testimony which provides a comprehensive overview of the department's work in these areas, and he will be available to answer any additional questions that you might have. . pa

while the reach of our

investigative and prosecutorial function is broad, we did not purport to have all the answers. as a general matter, we did not have the expertise, nor is it part of our mission to opine on the system causes of the financial crisis. justice department resources are focused on investigation and prosecuting crime. it is in this context i am pleased to offer my testimony and contribute to your vital review. the department has a long history of prosecuting financial fraud and we will continue to do so, working in concert with federal, state, local, tribal, territorial partners, the justice the -- department is using every tool, in using new resources, and a very best talent that we have to prevent, to prosecute, and to punish these crimes. by taking dramatic action our goal is to not just hold accountable those whose conduct

may have contributed to the last meltdown but to deter future conduct as well. the cornerstone of our work in this. it's a new interagency financial fraud enforcement task force which was established in november by executive order of the president and led by the department of justice. at the core of the task force mission is a more robust and strategic law enforcement effort focused on combating four types of financial crimes. number one, mortgage fraud. from foreclosure rescue and loan modification fraud to systematic lending fraud in the nationwide housing market to securities fraud, from traditional insider trading to ponzi schemes, accounting fraud, misrepresentation, to investors. third, recovery act and rescue fraud, including the fed -- theft of federal stimulus funds and illegal use of taxpayer dollars intended to shore up our financial institutions.

fourth, financial discrimination, including predatory lending practices in minority communities and the sale of financial products that exploit the elderly and disadvantaged. we will tackle every fraud case with the aim of recovering stolen from -- funds and we will enhance coordination and cooperation among the federal, state, local, tribal, and territorial authorities of the perpetrators of these crimes are brought to justice. on the last point, let me be very clear, when we find businesses or individuals whose disregard for the law the pocketbooks of average americans, we will use every available measure to hold them accountable. even before the launch of the task force the department aggressively responded to financial crisis by redoubling our fraud fighting efforts.

in addition to predicting bernard madoff, who perpetrated the largest ponzi scheme, last year we arrested the ringleaders of what is described as the biggest hedge fund insider trading case in history and secured 30-year and 25 year sentences for two executives of natural century financial enterprises following their convictions on conspiracy, fraud, and money laundering. we also devoted substantial attention to prosecuting mortgage fraud. right now the fbi is investigating more than 2800 such cases, up over 400% from five years ago. the recently enacted federal budget for 2010 will enhance these efforts and will be enhanced the legislative authority the congress provide it last year in the fraud enforcement and it -- act of 2009. i'm confident with the new

authorities, and bold new plan of action we can, and we will commit measurable, meaningful progress. in working together with our law enforcement and regulatory partners, we will succeed in restoring the integrity of markets, restoring tax. resources and protecting the vast majority of hard-working americans, investors, and businesses who played by the rules and to adhere to the law. i thank you again for the opportunity to participate in today's hearing and to outline the department's ongoing efforts and to address financial fraud in the wake of our economic crisis. i look forward to working with you, along with assistant attorney general, who will be happy to answer any of the questions. thank you. >> thank you very much, attorney-general. ms. bair. >> chairman angelides, vice chairman thomas, a commission. i appreciate the opportunity to testify on behalf of the federal

deposit insurance corporation. i testimony will focus on the failure of market discipline and regulations that led to the financial crisis and suggest reforms to prevent a recurrence. the last major financial crisis, the thrift and banking crisis of the 1980's, resulted in enactment of laws designed to improve the financial regulatory system. these laws significantly strengthen bank regulation and provided banks with strong incentives to operate at higher capital level with a less risk. at the same time -- unintended incentives for finance and service to grow outside the sector in a show called -- so- called shadow banking system. at the onset of the crisis it is estimated almost half of all financial services were conducted by institutions not subject to provincial regulation and supervision.

products and practices today net -- originated by the shadow banking system has proven particularly troublesome. many of these non-banks to grow to be too large, too complex and too interconnected to resolve under existing bankruptcy laws and also could not be wound down on the that fdic current receivership authority. we are now poised to make far reaching changes that will affect how we regulate the entire financial system. it will give regulators tools to address the system, -- we have long recognized-provincial -- credentials supervision if necessary. to be sure we can improve oversight of insured institutions but if the reforms only later more regulation upon traditional banks it will just create more incentives for financial activity to move to less regulated than use. such an outcome would only exacerbate the regulatory arbitrage that fed this crisis.

if that occurs, reform efforts will once again be circumvented, as they were over the past few decades. numerous problems in our financial markets and regulatory system have been identified since the onset of the crisis. in 2002 and early to death in 3, encouraged by a record low interest rates, there was a boom in the value of mortgage originations. these originations were driven primarily by the refinancing of existing mortgages. mortgage origination platforms grew to accommodate the surge in mortgage demand. by 2005, house prices were rising at double-digit rates, setting the stage for dramatic changes in the structure and funding of mortgage loans. because many prime borrowers have locked in by 2003, the mortgage industry shifted attention in ample lending capacity to a less creditworthy borrowers and homebuyers struggling to cope with the high price of housing. one result was a rapid increase

in subprime mortgage origination which more than doubled in 2004 and peaked at just over 20% of all of its nations by two dogs and five. declining affordability and high-priced housing markets also contributed to a shift toward non-traditional mortgages. the limited reach of prudential's supervision allowed this practice is to grow unchecked. for example, subprime and non- traditional mortgages work originated and securitized -- non-bank affiliates of insured institutions. securitization markets provided much of the funding for these loans. growth in private label the market to back securities was enhanced by this -- development of cdo and cds market. the size and complexity of capital markets activities that fueled the boom meant on the largest financial firms could package and sell the securities. compensation schemes fuelled

growth. many compensation systems when next this -- sufficiently link to risk management. the about high short-term profits to be translated to generous payments without regard of long-term risks. mortgages and many derivative products committed long dated risk while compensated toward short-term results creating perverse. another important cause of the crisis was a lack of strong consumer protection, especially in the nonbanks sector appeared increasingly complex financial products combined with opaque marketing and disclosure practices prove toxic. as a result, foreclosures are nearly 3 million a year and more than 15 million household saddled with underwater mortgages. finally, many financial firms grew to such size, complexity, and interconnectedness' that the market implicitly assume bigger to big to fail. credit rating agencies recognize this unpleasant guaranteed, greeting 1 rating,

with the without government support. as a result of their too big to fail status, age fund in joint funding of below market rates for the risks. the financial crisis revealed risks grow across the financial system, on an placement -- unimpeded by slow tide of regulatory framework, one for insured institutions and another less stringent for nonbank entities. differences in the regulation of capital, leveraged, and consumer protection among institutions in the shadow banking system and traditional banking sector and almost complete lack of regulation of otc derivatives a lot rampant regulatory arbitrage. the massive expenditure of taxpayer funds and their collapse of the financial system demonstrates the need for major financial reform that reduces moral hazard and improves the systems resiliency. these changes include a resolution mechanism that makes it possible to break up and sell and large, complex and to connected firm without taxpayer

support. i am very pleased at the bank ceo's who talked yesterday endorsed this. we believe there should be a free funded resolution reserve to provide working capital for this resolution process. we also support creation of systemic risk council to provide macro credential oversight and strengthen and harmonize capital leverage and liquidity standards as necessary. more effective oversight and improve transparency of derivatives markets is needed. finally, a rulemaking authority to ensure uniform consumer protection throughout the financial system. these reforms would go a long way toward preventing another crisis. but as the committee examines the cause of the financial crisis, i urge you to also consider other longstanding u.s. economic policies that may have played a role. rice's is a culmination of the decade-long process where national policy has skewed economic activity away from savings and toward consumption, away from an investment in our

industrial base and infrastructure and toward housing, and away from the real sectors of our economy and board of financial sectors. examples include federal tax credit subsidies for housing, compensation practices that promote short-term profit without regard of long-term risk, and implied, not explicit government backstops for large financial firms. such backstops -- no single policy is responsible for the economic distortions and no one of reform can restore balance to our economy. we need to examine national policies from a long-term view and ask what they create the incentives that will lead to better and sustainable standards of living. our financial sector has grown disproportionately 10 relation to the rest of our economy. as the financial sector claims less than 15% of total u.s. corporate profits in the 1950's and 1960's, its share is 25% in

1990 and 34% by 2008. finance services are essential to our modern economy but the excesses of the past decade, diverting resources from other sectors of our economy. we must avoid policies that uncovered such economic distortions. fixing regulation can only accomplish so much. longer-term, we must develop a more strategic approach that utilizes all available policy tools -- fiscal, monetary, and regulatory, to lead us toward a more stable and more widely shared prosperity. >> thank you for the opportunity to share my insights. the work of this commission is essential to help make policy makers and the public that understand the causes of the crisis and build a better

regulatory structure. many of the foundations of securities regulation, and indeed -- resulted from efforts of an investigation following the stock-market crash of 1929. when i became chairman of the sec in late january of 2009, the agency's financial markets were reeling from the events of fall of 2008. since that time, the sec has work to review its policies, improve operations and adjust the legal and regulatory gap the crisis had slade there. there are many interconnected factors and mutually reinforcing causes, so i appreciate the enormous challenge facing the commission. my written statement discusses many root cause of the detail but i would like to use my time this morning to highlight just seven of the lessons. first, requirements are around asset securitization months be strengthened. i believe this is the central as one of the major factors in the financial crisis derived from a subprime mortgage backed

securities. securitization of mortgages lead to an unintended facilitation of recur underwritings bandits by judy uighur underwriting standards. the financial crisis to exposed serious gaps and asset backed securities markets. as a result, today the sec staff is engaged in a broad review of the way asset backed securities are regulated. we are looking at disclosures, offering process and reporting by asset backed issue was. we are considering several proposed changes designed to enhance investor protection. this is a vital market and i believe a change is critical to restore investor confidence and facilitate capital formation. our proposals will seek to online interest of investors with those selling acid backed securities. to provide significantly more time for investors to conduct a careful analysis before investing. the bulls would require low- level data -- the accessible to

investors and the proposals for creating mechanisms for ongoing disclosure appeared a second lesson growing out of the crisis is investors and regulators in some cases tend over-rely on credit rating agencies. the route the crisis credit rating agencies performed poorly, high ratings for complex financial products with low- quality assets such as subprime mortgage is. nonetheless, many relied upon these ratings. in response, the commission is undertaking is a reserve will makings to improve ratings quality and reduce reliance by fostering accountability and competition. the third lesson is standards are weakened and regulatory gaps emerge when the risks of few regulations are not adequately appreciated and when markets considered to be almost always self correcting. indeed, it was quite recently

when many regulations particularly in financial- services as a key to foster market growth and competitiveness. unfortunately this met main elements of the landscape, like over the, derivatives, or subject to minimal or no regulation and it meant regulators lack the necessary information to identify, understand, and address growth. the dismal -- result was proliferation of complex products including derivatives, with illiquidity and other risk characteristics not fully transparent or understood. one very significant gap in the regulatory structure, lack of regulation of otc derivatives, largely excluded from the regulatory framework to thousand by the commodities futures modernization act. to address these gaps and regulatory arbitrage danger we need greater transparency and

oversight of otc derivatives and major market participants at dealers. such products should be subject to the greatest extent to central clearing. the current absence of regulation and transparency should not continue a fourth lesson from the crisis is there could be a direct relationship between compensation arrangements and corporate risk- taking. in fact, many major financial institutions created a sense that -- asymmetric packages, and on the suns for short-term success. we know some of the same positions resulted in to the debt long-term losses or failure for shareholders and taxpayers. in december the sec adopted new rules, improved disclosure in a risk, compensation, corporate government and director qualification. it requires companies to disclose compensation policies and practices for all employees, not just executives, if they create risk reasonably likely to have a material adverse effect

on the company. fifth, the financial crisis revealed a silo of regulatory framework is unable to monitor and reduce risks flowing across entities and markets. for this reason i support establishment of the council of regulators, out or to evaluate risk, cost to financial sector, to identify and address the issue. in addition i believe large interconnected institutions should be supervised on a consolidated basis. however, consolidated supervision is not a panacea and policymakers shouldn't remain aware of the limits of such oversight and regulation. particularly for institutions with many subsidiaries engaging in different, often unregulated multiple countries did system of risk-management requires meaningful functional regulation, enforcement and transparent market. while consolidated regulator, large into connected firms, are an essential a public to identify -- component, others

must be employed. more effective capital requirements and leverage the limitations, strong enforcement, structural revelation -- regulation and transparent markets to better understand the risks associated with a particular investment decision. a fifth lesson is markets and market regulation should promote, not undermine, investor confidence is essential to the efficient flow of capital and long term success of markets and economy. since the financial crisis began there has drawn. it must be addressed head-on to ensure markets are transparent and investors are treated fairly. accordingly, the fcc is taking a fresh look at market structure and trading activity to make sure they foster fair, orderly, markets to protect investors. in -- activities like high- frequency trading, flash trading

and dark pools. finally it taught us consistent and vigorous enforcement is a vital part of risk-management and crisis avoidance. through aggressive and evenhanded enforcement, we hold accountable those whose violations of the law costs of their loss and hardship. we also helped vindicate the principles fundamental to the fair and proper functioning of the market. investors have a light -- right to disclosure that complies with securities laws and there should be a level playing field for all investors. over the past year the sec has taken steps to improve the effectiveness of this enforcement, from streamlining procedures to removing a labor- management, to specialize investigative units. we are also currently investigating significant number growing out of the crisis and have brought more than a dozen cases recently against entities and activities associated with some of the worst practices.

there's still much more work to do to insure we do not see these problems repeated in the future. broker-dealers with significant proprietary positions are provided enhanced information about positions and the commission strengthens capital requirements by limiting the ability of large broker-dealers to use value risk models for regulatory capital purposes. most importantly we established an internal task force to review all aspects of the agency's financial regulation of broker- dealers to determine how these regulations can be strengthened. when the sec cannot act on its own we're working with congress to address the problem of too big to fail, strong regulation of otc derivatives, to close look -- loopholes to avoid oversight, highest standards of conduct for those who give financial vise, and resources required to keep up of new products, properly oversee, and

better deter and hold accountable entities who might be inclined to commit tomorrow financial crimes. in conclusion, there were many causes them lessons to learn. the enormity and worldwide scope of the crisis and unprecedented government response required to stabilize of the system demands a full and careful evaluation of every aspect of our financial system. no one should hesitate to admit mistakes, learn from them, or make changes needed to address the identified shortcomings and reduce the likelihood such crises will occur. thank you very much. >> thank you very much, ms. schapiro. we will now go to questions. as indicated at the beginning, the attorney general does have to depart so maybe a couple of questions from me and the vice chair, at which point we will go to

mr. attorney-general, " i would like you to look into a matter and report back to us -- in september of 2004, the fbi warned -- or the head of the criminal division of the fbi, assistant director -- warned about a "epidemic of mortgage fraud coursing across this country." indicated if it went unchecked, it could end up with financial consequence, a crisis as large as the s&l crisis. without saying that was the genesis solely of what occurred even though testimony indicates for many people, including miss bair and other faults, that mortgage fraud was a sudden event contributor, one thing i would like to ask you to do, if the department has not already done this, is to evaluate what steps were taken in the wake of

that 2004 fbi warning. let me just quickly ask, has anything been done in that regard, and if not, could you commit on our behalf to do the review of what was done in the wake of the 2004 warning? >> we are constantly in the process of reviewing that which we can do better. i am not familiar myself with that statement, but we will look at that. i will certainly a quick myself with that statement and would cause the statement to be made and we will review what the justice department has done since that time and make the results of that search available to you. >> great. what type of time frame -- maybe i will ask you to get back to us on what is a reasonable time frame for that kind of evaluation. >> sure, i don't think it should take an awful long period of time. as a said, we are constantly in the process try to evaluate what we have done, how to improve on what we were doing, so getting that should not take an awful long time.

>> as part of that, what i would like to indicate to you is i have been told by folks who served as assistant u.s. attorneys in places where there was particularly high levels of potential mortgage fraud, that it was an issue of the chain. i'm interested given the consequences, the question i asked the private sector i guess distich, when the information was made available what actions taken. what happened on the public side and the private sector side? the additional question that i have for you was, do you have currently in your opinion, or did statutory authority sufficient exist to prosecute financial crimes, specifically mortgage crime? did exist as it exists today? >> i think we certainly had tools.

that were available to us in the fight against mortgage fraud. as i indicated on my opening statement, the number of cases under investigation by the fbi -- with the passage of the fraud enforcement and recovery act era in 2009, we were given, i think, additional enhancements that allow us to look into these cases, i think, to agree to degrade and with more ability. the extended the bank fraud statute that allows us -- the conduct of private mortgage brokers, a tool we did not have before. this will make it easier for prosecutors to charge private mortgage brokers who engaged in fraudulent conduct. in addition to the tools that did exist, we have these enhancements from congress as recently as 2009. we are constantly in the process

of reviewing, what tools we have, where are the gaps in our abilities to prosecute these types of cases and investigate and we will not hesitate to interact with you and congress for additional tools if we are identified needs. >> one more request in this regard. as part of your a valuation i ask you to undertake, a branch of the, if there was knowledge about potential crimes across the country, the magnitude, was there at the time sufficient enforcement capability as well as authority? there have been reports in the wake of terrorist attacks september 11, 2001, there was a diversion of 500 white collar crime investigator -- as part of that evaluation, what warnings percent of the line, including fbi warnings, and resources and

authorities, was deployed in not deployed. >> a think that of was a very good question. certainly there has been a movement, fairly recently and understandably, to move investigative resources -- resources to national security front given what happened in september of 2001. looking at the numbers, on the other hand, in our budget for 2010, we have made combating white collar crime a real priority. the budget request that had been passed by congress and signed by the present provides nearly $50 million a program increasing to department to pursue white collar crime, including financial and mortgage fraud. we will have 50 new fbi agents and about 155 new attorneys will have the ability to work of these kinds of cases. our resources, even given those additions, are relatively limited and these cases are complex ones.

they take time and money in order to bring to fruition. but we are determined given the resources we have and the enhancements we are going to receive, to make this a priority area for this justice department. >> thank you. i think now that asked you a series of questions, i think what i'm really after the 2004 report of the fbi being one of the pieces, is an evaluation by new to the extent we may or may not the attorney -- by you to the extent wayne may or may not determine fraud, what actions were taken on not taken, i think that would be helpful to see if that is a whole had been plugged of made a material difference. mr. vice-chairman question but >> thank you very much, mr. chairman. thank you all for coming. misty it -- mr. attorney general, page 6 of your testimony, you indicated based on your area of responsibility,

law enforcement is putting in place from your structure a response to the financial crisis that is and will continue to be aggressive, comprehensive, and well coordinated. as you know, our charge from congress is to put together an explanation for the financial crisis, and given the time frame in which we need to fulfil that statutory responsibility, we are forced to be aggressive -- as comprehensive as we can be in the time frame. one of my concerns is, we probably are not as well coordinated as we should be in the collection of the necessary information for us to fulfil that function and if you will allow me, i will ask briefly of

both the sec chairman and the fdic chairman, a question that should be easy to answer prior to me asking you in essence the same question. on the sixth of january, spic entered into a written agreement with the federal reserve, signed by their chairman, for access to and sharing of information. as you might expect, the federal reserve deals with some very sensitive information. there was a period of negotiations to come up with an acceptable agreement on both sides. on the 11th of this month, the office of the comptroller of the currency entered into an agreement with the appropriate adjustments given the responsibilities they have. today, we are going to have an

agreement signed by the office of thrift supervision. my understanding -- and, ms. schapiro, you can correct me -- by the end of the day, fdic and sec will enter into essentially the same agreement? >> -- >> thank you. my understanding also, and you can correct me if i'm wrong, the fdic will reach the same written agreement with the necessary modifications, given the differences in jurisdiction that you have, is that correct? >> yes, sir, that's right. >> thank you. i assume you know the question i'm going to ask you -- mr. attorney general. >> and you may know the answer. >> well, if it is yes, we can move forward. although there has been cooperation -- and clearly,

given the focus of your law enforcement and the necessity for not divulging information in this -- pursuit of justice, there are a number of areas that would be helpful to us if of the department of justice and the fdic could reach a similar negotiated agreements. i know we have not felt it was necessary to do so up to this public, but i hope we can appreciate, as it takes a long time, to get some of the cases that you investigate to conclusion, our conclusion is pinned on the wall and it is the middle of the last month of this year. so, in anticipation of making sure we continue to have a smooth working relationship, is it possible for you to give an affirmative answer to my question? is it possible by the end of the

month to reach an agreement similar to others with probably even more understanding of what kind of information between the fdic and the department of justice? >> we will certainly work to make such an agreement possible. i would think that would be a sufficient amount of time. i think we have to understand the department of justice, we have a series of rules that prohibit us from sharing information, federal rules of criminal procedures, privacy act, and then with regard to ongoing investigations, the ability to shape -- share information is difficult. having said all that, it is certain -- we would endeavor to work with you to reach an agreement as its quickly as we can give a dam ok, i don't interpret that as yes. >> in negotiating with the fdic and others, they are also similarly constrained with

statutes that cannot allow the to share information. the one that would be most obvious is dealing with private entities in terms of proprietary, or as the lot is called, trade secrets act. we were able to work our way through those difficulties as well. my assumption is, since we have not placed in a letter in front of you, and you have indicated you are more than willing to work to reach agreements. and you indicated that the end of this month seemed reasonable and appropriate, let me say that i will accept your answer as a probably, and as a -- at the end of the month, hopefully it will become a certainty. if it hasn't, you might be sure we will revisit you. because we simply cannot conclude our job in the timeframe congress has assigned

us if we aren't able to get the appropriate, necessary, and protectional structure in place to find out what the government did or didn't do as well as what the private sector did or didn't do. i appreciate your willingness to go as far as probably today. ok, thanks. do you have additional questions -- because i have a couple for the others. thanks. >> actually -- i do know the attorney general potts is scheduled requires into the park. mr. brewer will stay. a lot to thank the department for being here and in advance doing what we need to do -- as mr. thomas said, let me reemphasize, we are here not just to examine what went wrong in the private sector but we have an obligation to force -- fairly and vigorously understand

what happened in the public sector, what happened in the regulatory agencies, enforcement agencies, helping us understand the full record of what did and did not happen -- action and inaction. thank you, mr. attorney general. >> and attorney general, is it probably at the current time? >> don't misunderstand the mother is a desire on the part of the department to cooperate. this is an important inquiry. it is important for our nation is going forward. it is important for historical purposes for us to understand why we are in the presence of jubilation. the only concern i have are the rules and regulations that govern the dissemination of inflammation of the department of justice accumulates. to the extent we can work out ways through those we will get it to you. it is our strong desire to cooperate with you in the effort you are about. it is an important one, vitally important one. the animation you develop will help us and our ongoing

enforcement activities -- the information you develop. >> elevated to most probably. [laughter] >> to -- thank you very much. >> i have a couple of minutes i will take right now and the vice-chairman probably has a couple of questions and then go to commissioners. i will hit quickly here and ask a couple of questions. ms. bair, i would ask you squarely. early on in your testimony you talked about the ability to curb subprime mortgage products, that the fed had a report in 2000, did not act on it. and i know our hearings had just begun. but the more i listened to yesterday, the more i read testimony, the extent, breadth,

nature of the product seems to have been a very significant force. as you said it in the end, they ended up being bundled and packaged by the largest institutions in the country. i guess if there was a moment -- what was the primary response ability for choking off the development of the subprime products that ended up living our financial marketplace? >> at that point, in 2000, this really was a type of funding that folks were doing. really back state it would have been easy to choke off because not that many were doing it. i think the only place to tackle that on a systemwide basis was the consumer protection rules, rules against abusive lending across the board. hindsight is always 2020. but looking back if we had good,

strong constraints at this time, simple standards like you have to make sure they repay the loan, the reset rate as well. >> i think it is fair to say, that was a critical point. >> i do. >> absent that, we were left with a number of states -- we will hear from state authorities -- who have differing levels of authority, who had constraints, and at times fighting pre- emption efforts. >> the states try to tackle this one by one. i do believe these efforts were thwarted -- thwarted in 2004, when the loss for national banks were significantly expanded, yes, to make it more difficult for states to deal with these practices inside their borders and i'm sure state representatives will be talking about that. >> and want to ask you and ms

cschapiro -- ms. schapiro, rating agencies -- not just their ratings themselves but the uses and capital standards. it seems that was an enormous hole but it seems to dave a hole and plugs. still a noncompetitive environment. deference and status given to those ratings. is it the whole system is essentially broken? it was proved to be worthless, broken, and remains so today? please respond, both of you. >> i am happy to do that. clearly they bear a large share of responsibility for some of the products that got into investors' hands, by virtue of the fact that they had high levels of ratings.

the converse gave the sec authority -- to begin to regulate agencies appeared before that the authority did not exist. agency engaged in a series of will makings in the next two years to try to bring more competition, tried to bring more a company -- accountability, and give investors a much better context within which to understand the quality. for example, requiring the disclosure of performance of ratings over a period of time. conflict of interest disclosures. most recently, we proposed rating agencies be subject to liability and experts will no longer receive that -- status under the law. but i don't disagree, the fundamental problem is the business model. when the issuer pays for the rating, there is a fundamental

conflict of interest that is very difficult to square. many of the rules have been an effort toward a realignment of the rating agency with that of the investor. there are a number of rating agencies that have the subscriber pays model. but we really have been encouraging entities to come to us within the business model. we are very open to improving that in the context of our existing authority to see if we can break down the walls and a genuine competition into the space. >> thank you. our piece of this, i guess, is whether the -- we have been relying on these in the past. we are proposing new capital rules. one of the things we will be doing is eliminating the ability of an institution for structured

finance product to rely on a rating to set capital unless they actually -- can identify the assets, ultimately aligning the structure product and do their own analysis of the credit quality. unless they can do their own due diligence and validate the risk associated, they will not be able to rely on the ratings. that will go out for comment. i think this will help a lot, to make sure the assets that actually underlie the securitization, somebody has identified and looked at them and not just a mathematical model and knows the credit quality of those loans. we are also trying to get our own house in order. premiums -- large banks, at the component is a credit rating. we will be eliminating that as a

factor of we will be -- >> if i can add one thing. and the last six months removed references to ratings at about a half a dozen of our existing rules to reduce our reliance on them. in the context of money market funds that have quality restrictions of the paper they can buy, that they cannot rely on the rating. it is important across the government that will start to move in this direction >> mr. vice-chairman? >> in regards to the rating agency is and the act, that act was signed into law in 2006, did you say? and this is 2010. and i am most familiar with having to get structures in place to oversee it. and i am quite sure the act that was passed was perspective. although clearly, the origins of

a lot of the problems that we have proceeded 2006. was there any action taken in 2007? >> absolutely. as you say, of the law was passed on to tell -- 2006. there have been no fewer than five seconds rulemaking taken under the act. as i say, it goes to much greater levels of disclosure, conflict of interest, including proposals to have them disclose revenue from the major issuers that they are raiding, their performance history, but disclosure on how they do due diligence. in recent proposal would require issuers to make available to all of rating agencies information that would allow

any rates -- rating agencies, not just the one that pays for the rating, to do an unsolicited rating so there would be a point of comparison. and to require disclosure of rating shopping. if i'm an issuer and have called to three agencies and ask, what is your preliminary review, and two tell me, double bb and one says aaa, i will hire the triple a. rader but i have to disclose the two bb ratings as well. >> sullivan commission that would be most helpful to us to analyze pre-passage -- and i wanted thank you for sharing some of the information with the appropriate safeguards in place because it allows us to understand and environment that needed to be changed but simply wasn't because what they were doing may not have been right

under someone's understanding of what is right, but it wasn't illegal, because we didn't have a structure in place. thank you. ms. bair, your comments were very good, especially your willingness to go outside of your narrow area of responsibility. i thought it was most appropriate in this particular hearing room based upon the role of the ways and means committee in terms of being, frankly, the only committee in the house undergird the constitution and the ability to deal with the tax code. it is amazing to me that a lot of folks still haven't focused on the fact that, notwithstanding in 1980's we were able to remove the disk -- deduction of consumer interest as itemized deduction, there is

still an overwhelming financial windfall in the attacks all for home ownership versus, for example, the same roof that you rent rather than own. and, that what might be helpful from an economic point of view for an individual was almost as responsible for the collapse when that individual -- ability its collective fleet exercise, i.e., being able to literally, with some of the financial agreements, cash out every month that equity that you have in your home, which then could be deducted. a point of interest that we came very close in the mid- 1980s to dealing with the deduction for consumer interest

in disguise of mortgage interest. the same thing we do with individual retirement accounts, you get penalized in some way if you withdraw for other than the purpose it was placed in a tax deferred position. but we still have not even talked about, to any great extent, penalizing people who utilize the mortgage interest deduction privilege for, in fact, funding consumer debt. that is an example of how far we need to go -- not even touching on tort reform or any other number of areas -- to really get to the bottom of this. some of them shouldn't be that difficult. but obviously all of the focus is on the committees that have

the jurisdiction or oversight and regulation of financial institutions. why this particular commission, notwithstanding the time difficulties we have, is truly unique because we don't have boundaries. i'm quite sure the final report will comment on aspects of the tax code and other areas which, of if you begin to lay out the scenarios and the consequences of decisions, which seems somewhat appropriate, if we had not allowed that kind of deduction, the equity in homes people had would have had a severe jolt to them but many of them would have accumulating -- accumulated sufficient equity not to be upside down. but when you push it to the limits for consumer use and you do get a downturn, like the panel we had it in front of us yesterday, difficult and

technical areas, indicated they never thought home values would ever go down. that is why you were supposed to build up equity. let me ask you some questions that i think are not specifically in your jurisdiction, so that somewhat the same phenomenon could be illustrated based upon your answers in your particular area. my understanding is you did not -- not you personally, but the agency you oversee -- didn't collect insurance premiums for a decade before the crisis in terms of the sec's regulatory structure. do you think that you had an overly optimistic view -- or the agency had an overly optimistic view of the balance sheets of banks, many of which held a lot of the mortgage structure?

>> congressman, as i understand in 1995, congress eliminated the ability of the fdic to charge premiums for well-capitalized banks, which was 90% of the bank's foreign at 10-year period you were talking about. i came -- 98% during that 10- year period. in 1991, charging from all banks, meaning insurance is a benefit for which you should pay. it took until late 2005 for that legislation to be passed. i came to the fdic in june of 2006. within two weeks by proposed rules to charge of everyone. the staff has been working on this. very much something the f.d.i.c. wanted to do. so, i do think congress has some responsibility. >> absolutely. but the term well-capitalized banks, was that a very narrow

automatic merkel decision? >> that is. >> no discretionary aspect to it? >> rehr -- well capitalized by regulatory standards, you did not charge premiums. >> thank you. >> thank you, chair angelides, and i would like to thank the panel for your testimony. i wanted to start by asking share bair -- chair bair about her testimony. i gather from your written testimony that you feel the over-the-counter derivatives market played some role in a financial crisis. i would like you to elaborate on that. >> i do.

the underpricing of risk. it created the illusion that people were headed when they were not really. the unregulated nature of that allowed large institutions to take significant risk with compensation structures up front that had a long tail to them, but not sufficient oversight. it also magnified the losses. once the underlying losses, mortgages going into default, it was multiplied by the losses on the derivatives contracts based on the performance of the underlying mortgages. it fit into the underpricing of risk by creating the illusion people were not hedged -- were hedged when they worked and then it magnified losses. >> has it at all complicated your job and resolution of failed banks? >> this and the creditor issue -- i know this is something the sec is very concerned about as

well. what kind of incentives the as the credit defaults swap market in particular have when institutions are to get into trouble? traditionally the creditors will work with them to stabilize them, to keep them out of bankruptcy. but if you have a large cds position, even if you have large debt exposure, if the institution fails the creates -- incentives. right now there is very little transparency. as chairman of the fdic i cannot access user information in the cds market. i think this is an area a lot more needs to be done. >> do you think the market still poses a systemic risks and any regulatory reform is needed? >> yes, i do. it is probably at the top of my list now in terms of things --

more than anything it requires congressional action because the laws that were passed before that, basically read this market from regulation. this should be a very high priority for congress. there is only so much regulators can do until the legislation is enacted. >> chair scapiro, did otc derivatives play a role in the financial crisis, and if so, what. >> i agree with chairman bair, particularly with respect to the macroeconomic issues. but i do think on the micro level they contributed, in a sense because the otc derivatives market could become the enron around the regulatory exchange traded markets, and options market, they allowed illegal conduct, to some extent. we brought a couple of cases in the to guard with regard to insider trading. .

i think all lot of them have been discussed to great extent in the regulatory reform debate. we need regulation of the products. they ought to be cleared through central clearing houses.

well-run central counterparties help to mitigate risks existing in the bilateral relationship. exchange trading, price transparency, oversight of the clearinghouse and all that brings with it -- and i also think we need to regulate dealers in the marketplace. some of the regulation floating around it takes a step in that direction, but there are still some holes. regulation of the dealers so we have sufficient capital, risk management systems in place, internal controls, and transparency to the public and regulators. i think these measures would make these markets more

comfortable for the regulatory community. >> we originally allocated five minutes per question. mr. thomas and i have spoken. with the ground we have covered we will allocate three more minutes to each. >> thank you, chair sheila bair, do agree that the reagan tort reforms that the other chair recommended? >> yes, it should be a high priority for congress. the chicks you agree that the regulatory reforms that the other chair recommended should be agreed to? >> yes. >> i also like to ask about a program that the sec adopted in 2004 called the consolidated supervised entity program. i think it was intended to bring

some prudential supervision to the large investment bank- holding companies. i think it covered a bear stearns, lehman brothers, merrill lynch, goldman sachs, and morgan stanley. one of which failed, some of which had to be acquired, and the others became bank holding companies. that was during the financial crisis. did the program fail in providing sufficient credentials supervision? >> we have to conclude that the program was not successful. as i understand the program was developed in regard to changes in european law that require the five largest u.s. investment banks be subject to the consolidated supervision by some entity.

because there were investment banks, not commercial ones, they elected to be supervised by the sec. the sec created the program. prior to that, the good news -- investment bank holding companies were not subject to any supervision at all. that was due to be good, to bring them under the umbrella of regulation. i have lots of concerns about the program and many of the specifics. generally, i think there were several problems. one is that requires the sec to become a provincial regulator, which is not traditionally what it had done. it had an enforcement orientation largely dropping out of its examination program. i don't believe the program was ever adequately staffed. there were handful responsible,

not necessarily even full-time, for the largest five investment banks in the world, not only in the u.s. the combination of a very new way to approach regulation, inadequate resources, and some of the specific changes made to the capital rules in order to get holding companies for supervision, broker-dealers were allowed to use value at risk models rather than a tier models to calculate. it allowed four lower levels of capital to support larger positions. in the nation and lead to a program that clearly was not a success. it is one of the things we're looking at and taking lessons learned as we try to rethink entirely the broker-dealer >> capital -- the broker-dealer capital. >> thank you.

picking up on this line of questioning, briefly, you refer to the april 2004 decision in your testimony on raising the lift -- lifting the cap on it for broker-dealers, but did that affect holding companies? in other words when i look to the balance sheet of investment banks there is a big bump up and leverage ratios from 2003 to 2004. did the sec decision affect that? >> my understanding is that the investment bank holding companies were not subject to any capital regulation prior to 2004. under the program it did calculate capital according to the bosul ii standard which clearly should be the subject of

intense scrutiny here. the changes that the sec made were related to the broker calculation. >> i am referring -- this is really your statement, ms. bair on page 31 where you say in your testimony that the sec allowed large broker-dealers to have large capital standards. you go on to say that in 2008 two institutions using those rules collapsed. i want to ask you both whether raising those capital standards were >> seminal > chairman mary schapiro is right. the sec from work concerning the basel purchases set capital -- a strong opponent of those rules. we blocked them from being used

by commercial banks and bank holding companies. where we continue to have dialogue with our fellow regulators on this -- we have said if they use those approaches, they may not reduce capital. if they use the model-based formula relies heavily on banks on estimates. we have said they should not be used to lower capital. commercial and bank holding companies were not using this at that time. there was a reduction in capital and increase in leverage because of it. >> all right. i just want to know yes or no whether that 2004 sec decision was one of the factors that led to the explosion in leverage, and therefore the collapse of institutions? >> i would say yes. >> and i think it is clearly a

contributing factor. it is hard to say to what extent. but the ability to use models that generated smaller cuts on positions allowed larger positions to be maintained on a smaller asset bases. >> one of the question, probably my last -- i asked mr. lloyd blankfein yesterday, and i will in writing ask it of the other financial institutions whether in the wake of the calamity that has occurred, whether they have done an internal review investigation audit of what breakdown? given the magnitude of what occurred it would seem logical and prudent. i made the request to mr. lloyd blankfein and intend to make it to the others, and to ask for the report. i would ask each of your entity's weather in the wake of

what appears to be suddenly as a potential colossal failure of the regulatory oversight of this nation, of our financial system, has the sec done an internal review, audit, investigation of what came apart? and if so, can we have that document? >> i can tell you there have been multiple internal reviews concerning the financial crisis. credit rating agencies, bear stearns, others. we're happy to share it. it is also important to me because as the new leader of the sec having brought in new leadership across the agency i want everyone informed by things that did not work out well. so that we can make appropriate changes going forward and build a stronger program across the board and across all agencies. >> yes, we have an ongoing self -examination. we have made a number ofi

changes number would be happy to give your written document describing the. when banks fail there is always a review of supervisory process. one piece missing is because the large institutions were bailed out. they did not fail. it is free helpful to provide -- we need to look better at what the supervisory issues were leading up to those of larger institutions becoming unstable. >> you do have those documents? >> for those smaller institutions, but they're not required for the larger ones. >> yes, but you will both provide as internal reviews? justice, and not sure if you have done this. i asked it earlier of the attorney general today, but particularly with respect to mortgage fraud we would like to see that report. have you done any other

examinations of four enforcement might have broken down? >> i am not aware of that, but we have had for good years task forces throughout the country that were prosecuting cases of mortgage fraud. as the attorney general said, our mission is not that of the regulator, but to hold those who have broken the laws accountable. with respect to that we work with our partners. >> i think the review of what was and was not done at justice would be very important to know in the wake of potential evidence of mortgage fraud across the country. let's go to mr. w. >> thank you. chairman sheila bair, may i begin with you? for banks we rely on regulation to protect us because there is much reduced market

discipline because of the backing of banks by the government. i want to congratulate you and thank you for what i thought was very candid testimony about the deficiencies of regulation in general. there is one paragraph that caught my attention. you say in your written testimony, the writ traditional rules and used by safety and soundness regulators like peer institution analysis did not detect individual institution excesses' because many of the peer ones are also analyzed addition the same risky activities. these were profitable until risky activities became unsustainable. what that sounds like is that it is ok, or was ok everyone was doing it. is that what you meant to say? >> i think the supervisory process going into this process did rely a lot on peer review and comparisons. that is absolute right -- if everyone was doing it and making

money there was not enough scrutiny. >> so, will you change that? >> we are. in terms of the fdic, yes. we drove down much farther on individual loan quality. will the loan perform two or three years from now? much less reliance, none, actually, on the fact that the guy on the street might be doing the same thing. the larger issue is having a systemic body to monitor -- even though something individually might look ok, if you look at the system as a. whole you might get a different it relates to the need for the council with the macro potential. >> a few things you said i thought were quite interesting and should be on the record. again, you said record profitability within the financial services industry also

served to shield it from some forms of regulatory second- guessing. often the put to the risks associated with strategies that give rise to outsize profits are not as obvious, especially when supervisors are examining new bank products or activities. then, finally, it proved difficult for regulators to rein in profitable, legal financial activities without hard evidence that they were creeping unwarranted risk. all of those things suggest that when active these are profitable and becomes very hard for regulators to stop them. >> mm-hmm. >> what are the pressures that come upon regulators when profitable activities are going on, and that you might like to keep?

>> we saw that in late 2006- 2007 with the colleagues trying hard to tighten up. a lot of industry pushback. somebody has to take away the punch bowl and it can be very difficult when people are making money at it now. but going forward this is a key lesson learned. the leadership of this body saying that regulators need to be supported as that of penalized when they try to do that -- >> do you think the lesson has been learned by congress? >> yes, i hope so. i think there is still some

pressure to forebear. banks are being closed by their chartering authority. the more that occurs, i think there will be more pressure to for bear and ease regulatory standards. we're trying to strike a good balance, but as they learn from the snl days the longer you wait, eventually they will have to close and it will be more expensive. unfortunately, many remember that from the snl days. >> how much more time to have? >> 3 minutes, 11 seconds. [laughter] >> in conclusion it is a, and i

wanted to follow this up a little bit littleyou say -- in hindsight this is your testimony -- it is fair to say the regulators either did not have sufficient information to understand how concentrated risk was becoming a, or if they had, then probably some did, they were unable to understand and identify the risks. why were they unable to understand the risks? >> i think -- another reason we need a system it risk council -- you might have information on what is on the books of secured depositor institutions, but what is going on in abilities has been opaque. the non-sector banks and third parties, mortgage originators who might be funded by banks, there are issues and the

strength of their underwriting might even be less apparent. there is a need for a more holistic approach. macro and micro mechanisms. the council is very important. in terms of analyzing and not understanding well enough, that has to do with not being enough forward-looking at ourselves. not enough of that analysis was done. >> this is not the question of capacity to understand complexity, a rather the fact that your scopas not broad enough? >> because we do have a stovepipe structure, the ability to access information and analyze it is lacking. yes. but even with regard to the information which could have access, none of us did as good job as we might have any way.

>> thank you. i have one simple question. there was quite a lot of discussion at the time we were going to the crisis in 2008 june through september, about manipulative short-selling. this seems to come up every time we have a market crisis. the allegation is that the short-sellers are creating rumors. they drive down stock prices and profit from that. the sec has investigated that quite a lot. have you continued to investigate that? have you found any indication that there is manipulative sure selling going on? >> it is a precaution. we do confront short-selling issues virtually, virtually but i will say we are still investigating it.

it is extremely complex. especially with respect to rumor-.- to separate rumor from reality if you're looking at bear stearns or lehman brothers. it is not simple. the extent to which short- selling has added real information to the marketplace about the pri price, that is good. to the extent it is based on rumors or designed to drive down prices artificially, that is terrible. sok, our investigations try to find a path through enormous amounts of data. wheat traded billions of shares per day in this country. to understand where we have cases that could be brought for manipulative short-selling. -- we trade billions of shares per day. >> we will not have enough time,

so if you would allow us to send some questions to you for response, we would appreciate it. >> we would be happy to. >> frankly, after we asked the questions there are broadcast and follow-ups, and we are learning. we appreciate the opportunity to ask you questions in context and have you get back answers toi us answers understand you are most probably willing to respond. >> i think that is fair. >> we got two yes's there. >> one follow-up question for you, chairman mary schapiro. if we get a memo on the uptick rule?

i have heard lots of people argue passionately on the question. i have yet to find an economist that i respect his as it matters one way or the other, so just for later i would like to hear what the best thing is from your economists. >> we would be happy to provide that. we have spent many hours analyzing all the, research the soliciting that thresearch and data. >> i'm not sure that we need to care. >> many cared deeply on both sides. >> right, and i cannot figure out why. chairman sheila bair, someone said on nbc that the financial crisis is over. you possibly more than anyone are having to deal with at minimum the ongoing effects of it, both with foreclosures and with dealing with failed depository institutions. a couple of questions.

one is a request for follow-up. we had two witnesses pretty aggressive in criticizing. if you could just give us your best thinking about the best case. or you don't know concerning modification. in particular, in terms of how affective you believe it has been in terms of number of foreclosures avoided. you are still having to deal with failing depository institutions. as i a understand it, as you resolve those institutions you must tap into the deposit insurance fund. you have an $8 billion deficit in that now. one expert told me to get back of your target reserve ratio, and the ballpark of 75 up to $100 billion is what you need. you have a proposed rule out there for new fee to help close

some of that gap tied to bankers' pay. today we have a new proposal from the administration which says, let's take $90 billion from large financial institutions. i want to ask some questions about that, particularly how would affect your ability to have the funds you need in deposit to resolve these institutions? one is that insured depositories are part of the new administration proposal. are you concerned that that conflicts with your ability to get the money you need from them for the debts? >> a couple of things -- >> excuse me, one of the things you to do it if anyone is watching, try to keep them in the loop and dimensions hemp. the mortgage foreclosures --

homeowners modification program under the president's -- >> yes. >> as we carry on these discussions, for people who are not tapped into the jargon -- >> sure. >> let's -- >> a couple of things. we put out an advance notice rulemaking asking the question, given there's a lot of evidence, front-loaded compensation structures encouraged risk- taking and contributed to some of the problems we're having. we asked whether to be factored in the deposit insurance premiums. if so will be revenue neutral. it should be allocated. those who have the front-loaded competitions should pay more, and those with callbacks -- clawbacks would pay less.

i have not seen the proposal you mentioned in the paper. i a understand that there is a liability-based fee and they're taking deposits out. the institutions have paid a lot and premiums. we have tried to be mindful of the balance between maintaining the integrity of our industry base, the insurance fund is very important to keep industry- funded. to try all we can to go to taxpayers. everyone has had enough of that, but we have tried to get one specialists estimate. we realize the industry is so and distress now. the payment of three years payments -- cash that they can expand over time so that all have to take an immediate hit in capital. i think it is a good balance.

we have about $67 billion in liquidity now rejecting should be sufficient. >> deposits have been taken out but insured depositories have not? >> i have not seen it, only read about it in the papers. i would be happy to more thoroughly respond once i find out. >> more broadly, your testimony talk about too big to fail institutions. in particular about regulatory arbitrage and firms that pose large risks just plain the system to avoid regulation. your system of deposit insurance is roughly a risk- based system and designed to cover your entire universe of insured institutions. this proposal is that there are significant, large financial institutions, fannie mae and freddie mac, the auto finance companies who we clearly have

evidence had posed systemic risk, but are exempt from the new tax? does that concern you at all? >> of like to respond in writing went to have seen the proposal. i'm only operating on press reports. i would be happy to respond in writing. >> another further element of that, they have $90 billion they think coming from the new proposal. you need somewhere in the ballpark for your deposit insurance fund. you cannot use the same money for two or three purposes. possible uses can be to repay taxpayers, two is to close the hole in your fund, three is to pre-fund liabilities from possible future failures. i would be interested in writing

for you to give us your views with regard to this new proposal, should those funds the first targeted to address the ongoing programs we know about -- i'm sorry, problems when about with insured depositories? >> i will be happy to respond in writing. we have already incurred losses and reserves the bell 66 already. based on our stressed hearings, pretty stressed, unless the economy enters more difficulties, we think the collections now should be sufficient and we will have no additional needs. this must be heavily qualified based on economic conditions.

we were dealing with the affordable mortgages and other issues early on. more and more not it is driven by the economy and credit deterioration because people lose their >> jobs > may i have 20 seconds for follow-up? >> what would be great, two of views on mark to market accounting, an accounting problem or regulatory? capital regulatory it would be fascinating to see coordinated responses from you both as to your views which is pro-cyclic qualiality, what is e best way to address that? >> ok, we can. >> mr. thompson?

>> it would not be unusual in the aftermath of the crisis for the regulators to say that we need more regulations or better regulations. my question centers around over- the-counter derivatives -- whether adequate regulations in place at the time of the crisis that could have prevented it had we executed better within the regulatory agencies that we already have in place today, and the existing laws? >> i would love to perhaps supplement my answer because i can think of many things were the to talk about in this context in addition to other counter derivatives, hedge funds, not generally thought to be a central feature in the crisis because we have almost no information about them. we do not really know. but i would point to two things.

one, the asset-backed securities market. while there was regulation in place, we think we could do a lot better in terms of the quality of disclosure at the asset level for investors in a way to not just dump disclosure on them, but giving them the tool to understand the quality. ongoing disclosure after the first year which has been a big issue. time to do diligence. all of those things. the asset-backed cities market, and the fdic is working on it in some regards, is where we can do a better job. supervision more generally. as a look back over the sec's program we have a lot of lessons learned about whether models are reliable, stress-testing was sufficiently robust to understand what would have been

in dire situations. whether putting assets off the balance sheet into specialties really meant that there were off the balance sheet. there are a number of areas like that where there is perhaps a failure of supervision, a failure of the vision to understand where some of these products might take us, and also for the were not adequate rules. >> in short come yes, or no? >> i forgot the original question. >> could the existing regulations in place today if well executed, could have prevented this? >> more the supervision than purely the regulation. >> ms. sheila bair? >> there are two missing elements. a lack of consumer protection. also, there was no systemwide

accountability. there needs to be anybody for consumer and also for systemic risk >> council > if you to look at some countries outside the u.s. such as germany, the u.k., japan, they have just one entity that regulates what goes on across the markets, yet we have a patchwork quilt of agencies involved. would we not be better as a country to have a single agency doing this as opposed to the multiplicity of entities we have today? isn't that what the council is trying to solve? >> i think the council is a bit of a hybrid. some of the regulars proved to be friendly captive and not particularly robust. there are problems there which is why we think preserving some autonomy among the agencies, and

all those serving as a check on each other -- capital and liquidity standards -- that is the best model with better checks and balances in a monolithic regulator. there is some ownership to look of the system and take account building. >> i very much agree. the single regular model did not prove to be more resilience or effective during the crisis. >> what about during the recovery? >> it did not prove much more effective than the u.s. system. we very much support the idea of diversity perspectives from the council about different types of institutions, products, and strategies to the broader group. it needs to be coupled with effective supervision, particularly of the largest

consolidated entities by a systemic risk regulator. >> yesterday when the bank presidents were here several said they created instruments that really had no value. hence the siv's. these were off balance sheet items we saw in the collapse of enron, yet a part of the amplification of this crisis. how is it that we could have off-balance sheet items of the magnitude that we did in this crisis post-enron? >> that is an excellent question. after enron accounting standards for u.s. public companies did revise their accounting estimates for off balance sheets. primarily directed arrangements for their non-financial assets being held off the balance sheet of a public company. it did not affect the

securitization of mortgage loans off balance sheet, which is central to what happened. in 2008 before i arrived at the commission asked me to improve reporting for off-balance treatment of assets and secure decisions. i went ahead and did that in the middle of last year, and we do believe the new standards will result in on-balance sheet presentation for secure decisions. that sentiment is a very clever industry and we have to be very watchful to make sure it does not come back on the balance sheet. and that we have a full transparency. >> the cover nature of the industry gets translated into financial innovation. so, can the sec and the fdic and any other regulatory body really keep up with the pace of innovation in the industry, the

cleverness of the innovators/ >> it is a great question. there is an addition that is valuable, and that which generates additional fees for the innovator. it is a big focus of the past year at the sec. historically we have not been able to keep up. we created a new division. in september we brought in some cutting edge experts on modern financial markets and the intersection of innovation and the law. it is our hope that this group of experts available not only to the sec but also to other agencies will help us understand and the sect new products much more efficiently to understand where the risks may lay so that we can prevent it or ensure that investors are well informed and regulators have a good handle on the risks they are creaking.

>> what we wrap up with this? >> we were highly supportive of bringing these off-balance us its back on to the balance sheet. it is a big problem for the fdic. their capital levels were being overstated. we are highly supportive of that measure. i think it is a lesson learned. in terms of innovation, yes, you don't want to discourage it, but need flexibility to address it when it takes a bad >> turn > thanks, good line of questioning. i will take a minute to follow up on the question mr. thompson asked. >> in the wake of enron which are watched very closely. i was on the board of the state pension funds which took enormous losses. it was a warning sign. how in the construction of the

rules onsiv's, how on earth were mortgage securities, already pretty substantial in the marketplace, excluded? whose decision was it? the sec? the public corporation, public in such board, or a matter of lobbying? >> i really do not know. i would be happy to supplement the record. it happened many years before i got to the sec. my understanding is that it was focused on non-financial assets being brought back on to the balance sheet. >> would you please look into -- is that an sec decision, or that of the country oversight board? >> by fasb?

>> yes. >> if you can get that to us? i'm interested as to whether there was any active advocacy by folks to exclude asset-backed mortgage-related assets as somehow different. i would like to see the arguments made for them if so. or, relevant to the question of mr. thompson, they just did not understand it enough to understand the different vehicles out there? >> to go. i also want to piggyback. to a certain extent we had an earlier discussion -- thank you. we had an earlier discussion, chair sheila bair, in which you did mansart in terms of the well-capitalized banks, and the lack of any real discretion to deal with the structure there. jake in which you deal thed with

them. you have a prompt provisions in which regulators can over the banks reading below well- capitalized on the suggested grounds. i guess it is back to the question about devices is tied to real estate. if you're looking at the banks now standing under the structure that was there there were well-capitalized. did the fdic, or the think they should have looked up, what i guess is the excess exposure by some of the institutions to now what we believe to be risky, housing-related assets? >> i think it is absolutely true that the integrity of the capital ratio will depend on the honesty of reserving against projected loan losses.

if reserves are low the capital level will be overstated. you are talking about 1995-2005 -- >> in the context of looking at it now of finding out that by 2007 what you looked at all the way from 2002, you had the ability if discerning enough to believe that the assets were riskier than what would otherwise be required. that makes you prescience when others were not. was the fdic prescient? >> i think that we were earlier. we began to do special exams on subprime very early. the primary regulators, onlyone -- we ordered them out of the

business in february 2007. hindsight is always 20/20. we tell examiners not to go in and the down to the loan books, and make sure reserves are adequate. half > given your area of jurisdiction that is what i'm concerned about. how many banks failed in 2008? >> probably about 25. last year there were about 140. >> you have a watch list, obviously. >> yes. it is important to understand that many of these toxic loans were not on bank balance sheets. they were outside banks. >> i understand, but to the

degree that there were i want to look at it. how many banks are on the watch list now? >> about 552. >> you have a number for 06-07, so that i can begin to look at that? because in retrospect not listening the limited involvement, how many of those figures were directly related if we're able to make that judgment, to that aspect? which could have been available to you under the prompt collective action provision had you been fully aware of how -- somebody back there is shaking their head no. so i will wait. >> the processes are laid out in statute. it is probably better to put this in writing. >> everybody missed everything to a certain extent.

i am not try to pin you down, but i'm very concerned that we are not looking at that on an ongoing basis. so, if you give me the data, we will go from there. thank you very much. >> on my minute remaining i will ask one follow-up. have you done any data collection on, or can you give us a read here about how many failures are related to subprime toxic assets versus the collateral damage that resulted from the meltdown? >> yes, we can get that to you. >> having spent the better part of the last decade investigating and prosecuting the financial fraud as enron i am tempted to go into the special investment off balance sheet vehicles, but i will temper my desire to do that. i would like to focus and

follow-up on something i approached the private sector people with yesterday. the credit rating agencies issue is more serious than just investor pay -- the issuers pay for it, rather -- they pay as a percentage of the issue frequently. it is important for the public to understand. institutional investors for the most part, particularly pension funds, can only invest in securities rated aaa. since the credit rating agencies only get paid if the issue gets sold a, and get paid frequently as a percentage of the amount of money, amount of these securities that are so, and since they only get paid if the deadlock, and cannot be bought and leunless they are aaa, thisa

conflict of interest of gigantic proportions. the credit rating agencies are not the only ones who operate like this. the auditors are paid by the issue were to audit the financials, the lawyers who draw up the prospectuses, an investment bankers who charge, are paid in cash as a percentage of the issue when sold, and customarily they lack any financial consequences for the success or failure of these securities after they are sold -- and we have been talking here about how financial innovation sometimes eludes the abilities of regulators to regulate because it is so innovative. do you think there are any market mechanisms that you're agencies could put into place that would assist in enforcing accountability afterwards? for example, one would be, could some percentage of the fees be

taken in the securities actually issued, rather than in the cash? if they perform as represented, then everyone does find, including the people responsible for doing the due diligence to reject them. if they fail, then they suffer some consequences also. >> looking at risk is very interesting -- eating their own cookie, so to speak, would be interesting for us to export. there is one other difference between credit rating agencies and other gatekeeper's such as auditors or lawyers. rating agencies have been shielded from liability, whereas the others are frequently sued, or can be when transactions go awry. we have proposed whether credit rating agencies ought to be

subject to experts liability as others are, in the offering of securities, and whether it might impose some additional discipline on how they conduct the business, and be an effective check on their enthusiasm for highly rated everything. one of the things we're quite interested in exploring is with respect to our new securitization proposals, and with respect to sponsors who would like to use at the shelf registration process as a faster way to get to market, that there be a risk retention >> requirement > any thoughts, ms. bair? >> the idea of reaching agencies being paid overtime and tying their competitions to the securities that they rate at aaa -- i agree. it has some major advantages. in terms -- having risk

retention for the originators of the loans is also good if the keep more skin in the game. i also think, to give back to the earlier point, transparency is keeping thy. >> may i just add to that? investors rely on routines in these complex structures because they did not have much choice in many instances. we would like to move forward with a level of disclosure to give investors the ability to second-guess the rating agencies. we want to do it in a way to provide standardize, formated

information so that investors are not just dump with massive amounts of loan-level data. it is a project that we have well under way at the agency. >> if you could report to us in writing on the progress of that investigation? >> be happy to. >> this general concept of accountability for the failure or success of these securities that became toxic and contributed to the crisis is one thing we will continue to explore as we move down the road. have you had any experience or discovery ofup the line involvement or conspiracies to generate numbers of loans that are particularly juiced up?

thethat have high interest rates and are able to be securitized into packages and ultimately sold? and the extend to which private sector providers of capital and accumulators of capital might have been involved in encouraging brokers to provide the loans, to create loans that everyone could benefit from and earn money from all along the chain? >> commissioner, we continue to look at the entire continue one. -- at the entire continuum. if you look at what the justice department has done and also what the fbi has a, an act of the first level -- and there have been many prosecutions throughout the country -- >> could you pull mic towards you? >> at mortgage fraud by

professionals, but agents who defraud the banks by coming up with false appraisals, store buyers. as it continues we do look at it. we look at those acting fraudulently with misrepresenting the underwriting process. what do banks say about their underwriting process? we're looking and have looked at that, and will continue to. when they break laws we prosecute. to continue, we're looking at the conduct of securitizers themselves. what did they say to those who securitized them? there have been prosecutions of agents and others who have reported that the assets they

had were backed by perhaps in certain cases, stood among, which were considered to be of a higher grade, when in reality they were supported by much riskier investments, mortgaged- backed securities. finally, we look at the institutions who acquired the secure decisions to seek what they said to the investment public about what they had. there were incentives at every steps and it appears for some profiting not to be candid about what they had. we're looking at all of those and have been for a while, and are now. >> we are out of time. really quick. >> the statue to this commission was created under provided the

enforcement act, additional resources to each of your agencies for the purpose of investigating this. >> thank you. >> i wanted to begin with you, sir. mortgage fraud is a tragedy for those involved. from the perspective of our job in determining the source of this enormous fun into a crisis, its magnitude is center. do you or any of your affiliate's on the task force have fraud nationwide adjustments of the fraction of mortgages tinted by fraud, versus simply? performed simply >> i cannot give you an overall estimate. we have an enormous number -- the fbi itself has had for a

number of years regional task forces, and as the attorney general himself said, right now there are 2,800 active investigations on the federal level around the country just of mortgage fraud. we see a snapshot of it, at the point when we have the investigation going. we look at tens of thousands. last year the was probably somewhere between 65,000 to 70,000 suspicious activity reports just with regard to mortgage fraud. that is only with the beginning of the investigation. it is obviously widespread. we pursue those throughout the country. either criminally, or if not, civilly as well. >> it would be very useful to know things like, of the sars how many prosecutions?

out of those and many mortgages are involved? regionally, what did the origination look like? if you could share information available so the magnitude is documented, that would be helpful. >> i think we can, and well. >> this is the happiest day of my life. thank you for resolving whether the uptick rule matters and whether short-sellers ruined the world and whether short-selling matters. i looked forward to your reports. it will be wonderful. there are still a few mysteries left. . .

instead, they were allowed to use the model under basel. the result was that smaller amounts of capital were able to support larger positions. >> thank you very much. i just did not follow that the first time around. i am looking back at the crisis -- and i am about to -- i am looking back at the crisis, and i'm about to do something i hate it when i was at that side of the witness table, which is you now own the sec, congratulations, and i am going to blame you for everything that happened years ago -- in looking at the crisis. if you look back at the crisis, the sec is essentially missing in action and publicly silent. my question to you is given that it is now quite apparent that an enormous component of this crisis is the inability to assess counterparty risk, the

essential to that, it is often asserted lehman's interconnectedness and pervasive impact when it failed, why, as the provincial regulator, was the sec unable to say publicly something about the genuine financial condition of the large investment banks at the center of this crisis? >> it is a hard question for me to answer because i was not there and i do not know the decisions made by my predecessor about what to speak to and what not to speak to. it is my believe, having looked carefully at the program that existed at the time that i consulted as supervised entity was also disbanded by my predecessor in the fall of last year, that the agency never made a full commitment to what was a voluntary program, and i think that is one of the flaws of the program. the five entities that chose to

be regulated could also have chosen to do other things and the regulated elsewhere. i think voluntary regulation is a bad idea all under almost any circumstances, but secondarily, i do not think the resources were committed technologically, or human resources to become the kind of consolidated supervisor that was really called for under the circumstances. i can understand clearly how the changes on the capital rules impacted things, and we can fix those. we do not regulate on a consolidated basis and the holding company's any longer. i can provide resources. we can support the program, we can rewrite the rules, but i cannot really address for you all of the failures of the program historical. and that it does seem clear in retrospect that there was an inadequate effort to assess the risks of the institutions? >> i think there was reliance on

models, which turned out to be quite flawed in many ways, some internal models relying on a recent historical observation. that turned out to be pretty irrelevant when we got to the financial crisis. i did not think the measures really cap it all the risks that were appropriate to be captured. i think there was not sufficient pressure on the firms to do really robust economic stress testing of their models under the sort of low probability/high stress scenarios. i think there is a fundamental misunderstanding which were shared by many regulators that secured funding would always be available, and it was not at the end of the day for bear and for lehman. i do not think anybody envisioned even in the back of liquidity pools that were required under the program, it was not envisioned that secured funding whatever dry up completely.

all of these things, i think, came together to render this program at this time ineffectual. >> was the sec's mandate simply too broad for it to be effective that particular functions? >> i do not think so. i think -- but i will say i think it is quite -- >> excuse me, the chairman should use an additional -- the gentleman should use an additional two minutes to pursue this line. i think it is useful. >> the sec had very successfully for many years regulated broker- dealer, and broker-dealer capital and broker-dealer net capital and customer protections are designed to protect the assets of the customers at the broker-dealer, and that have worked extremely well for many years. i think it was a geometric difference in supervision and regulation to grow from broker- dealer regulation to the regulation of here to for

unsupervised holding companies and multiple of serious, and i think that is not something that you do overnight. i think it is a program you build over time. you bring in tremendous resources and expertise. the sec did not have the budget to do that. the agency did not have sufficient resource commitment to this kind of a regulatory program. >> last question for both of you, we heard testimony yesterday from a gentleman who did extensive work identifying the fundamental weaknesses and a lot of securitized assets based on subprime mortgages. he took the evidence of the danger that it presented to bear stearns and was told it was rejected. he took it to the federal reserve board, and it was rejected. did he bring that evidence to either the sec, which would

have had a clear interest, or to the fdic? and if he did not bring it directly, were you aware of this research? >> i am not aware of it. i would be happy to find out and private information. no, i'm not aware of it. [inaudible] he probably would not have talked to us. >> thank you. >> thank you, mr. chairman. earlier today, i was on a c-span call-in program, and several of the callers raised the issue the degree to which this crisis was a function of over-governmental regulation and intervention using, as the primary example, the community reinvestment act.

in your investigations, have you any opinion as to whether excess of government involvement or regulation has contributed this? and if so, in what manner? >> senator, from the perspective of the department of justice, we really do differ to chair bair and chair schapiro and other regulators as to what needs to be. our view needs to be we continue to look out at a comprehensive approach with respect to the criminality, and where the criminality is, we are pursuing it. i just do not think that given our perspective, we can rely on the level of regulation one way or the other, but we are looking at regardless of the level of regulation where people made false statements or active in criminal manner, we will hold them accountable. >> let me ask the same question.

>> we have looked at their role in this as have other banking regulators, and i think we have concluded it was not any kind of significant factor. it only goes to ensure depository institutions. the lion's share were made outside of insured depository institutions, so i know the people debated and other issues, but in terms of driving this, we have no evidence of that. >> we do not have responsibility for the administration of the cra, so i do not have a deal about that. >> were there other areas of government action or regulation that you have found to have contributed to the crisis? >> as i mentioned, i think the gold needs to be looked at. i think the gse's also invested in a lot of private label

mortgage-backed securities, which have been a big loss for them, so i think that is something -- i think there are pros and cons of having those types of entities, but i think that is an area of significant government involvement. >> i would agree with that. it is incumbent upon us to look carefully at the role of the gse's and more carefully define a role going forward. >> you commented earlier about the fact that the rating agencies were not subject to private litigation, and to that degree, were less accountable. back in 1995, congress passed legislation called the private securities litigation reform act, which had the effect of making it more difficult for private investors to use the

judicial system to hold alleged defrauding entities to account. what effect do you think that legislation has had in the degree of fraud we are now experiencing. >> that is an excellent question, and i would like to give it more thought and provide you an answer in writing. there is certainly data available. stanford university runs a center that tracks the litigation and does an analysis of it, and i guess i would like to look at that and some other information before giving you a clear answer. i do believe that holding parties accountable is a critical component of effective regulation and effective discipline on our financial system. what i cannot tell you is the extent to which that law in particular may have lessened the discipline that would be helpful here. >> thank you.

in your written response, if you could broaden it to include any recommendations that you might have as to the goal of private litigation as an enforcer of fraudulent behavior within the financial arena. >> i would be happy to. as a general rule, i think the view -- certainly my view, and i think the view of the commission historical has been a private rights of action are a very important adjunct to our civil enforcement and the justice department's criminal capabilities and that it instils an important discipline in the marketplace. >> thank you. you have commented about the issue of compensation and setting some standards. i have been concerned that yesterday, what we heard some the representatives of major financial institution seemed to be that all of the performance that was intended to be induced

by different compensation packages, was essentially internal to the financial institution, enhancing its profitability and success as you are developing some compensation proposals. do you think there are some external factors that should also be included in the performance evaluation of the executives and other officers of a financial institution? as an example, the fundamental purpose of a financial institution is to be an intermediary and allocate resources in a way that advances the overall economic well-being of society. is that a consideration that should be part of the performance evaluation of the executives of a financial institution? >> i think your answer would

depend on whether i was speaking as a board member setting compensation or a government regulator. as a government regulator or deposit insurer, are thought is financial risk, so we will be looking of structures that we think create incentives for risky behavior that could put the institution in peril and cost us money. that is our statuary -- statutory authority. what specifically would for holders and shareholders, you need to step up to the plate, and i know there have been efforts to empower boards and shareholders to deal with this, but from that respect, i would assume that what to look at what kind of corporate citizens of and leadership is being provided. >> you have talked about regulatory change. the sec has been a particular target for that regulatory

change, and in the middle of the president's campaign in the fall of 2008, senator mccain called for the firing of the chairman of the sec. i think it was the only financial regulator who was specifically called out to be terminated. are there any peculiar structural issues within the sec backed deserve specific attention as part of the general consideration of regulatory change within the financial agencies? am i that is a very good question. -- >> that is a very good question. i spent my nearly one year at the sec trying to understand where our strengths and weaknesses away and take action to try to bolster our programs wherever we can. we created, for example, this new division of risks, strategy,

and financial innovation to help us identify risks as they start to build in the markets we regulate. we brought in a lot of new leadership across the board. we saw very different and new skills sets in order to -- we sought very different and new skills sets in order to change our structure. i did not think there is anything peculiar to our structure that leaves us more politically vulnerable. i started at the sec 20 years ago and had the same feeling then that it is actually quite an independent agency that seeks to do what it believes is right in every instance. that said, the one area where we have less independence than our fellow financial regulators is that we are subject to an appropriations process in congress and for the president's budget, while the other financial regulators are self funded.

>> would you like two more minutes? >> thank you. i am going to ask a question, but i will first declare a potential conflict of interest. i am one of the public members on the american institute of certified public accountants -- the word "accountant" has come up a few times. any suggestions to that specific profession that you would make as to how they could play a more effective role in suppressing for our or other steps that would tend to mitigate the prospects of another crisis, as we are currently experiencing? >> i think it is critically important, and this was a debate in the regulatory reform context earlier this year, that we continue to have independent standard setters for accounting going for it, and that they

focus on what the purpose of accounting standards is, which is to provide investors with all the information they need in an unvarnished, honest, and direct way to make rational account -- capital allocation decisions, so i think it is particularly important for the profession to continue to remember that the investor is their audience at the end of the day and that they establish accounting standards that further the interests of investors in full disclosure. >> i would just say that i think one area where bank regulators and accountants, the dialogue is on the issue of provisioning against losses, and i think all bank regulators agree that the current rules are too restrictive. they're basically has to be an event making it and probable before the bank and reserved against it, and that perhaps lead to banks being under reserve going into this.

>> senator, -- i was just going to recommend, week of the department of justice love the will of gatekeepers. whether you are an accountant or anyone else involved in the role of fraud, we will go after you aggressively, and if you are aware of it and part of it, we encourage people to come in before we come knocking on your door. >> thank you, mr. chairman. i am, at the risk of making your day less happy, i am going to back to short selling. sorry about this. i want to talk about transparency because there's an awful lot of requirements either for filings or disclosure that relate to long positions. in a particular, ownership by the usual funds.

those types of disclosure requirements are not necessarily required on the short side, and without a doubt, short-selling is part of an efficient market, but i do think it is worth noting that observers with any real economy and perhaps on main street, the lack of burkhart -- are concerned that the lack of requirements for transparency or disclosure may have exacerbated the problem. if you look at some public companies, would depend on investor confidence, who at that time may have been negotiated them, and you have a stock goes down 9% with 50%, there is a significant amount of capital that is lost. to say nothing of employees who watch stock prices declined precipitously. and that obviously are frightened. not necessarily part of the financial institutions.

could you please comment on whether you think there should be more transparency in this area? >> as a general matter, i am a huge fan of transparency across the board because i think when people understand what all the issues are, what all the positions are, that we all are able to have real market discipline in the way we do not when the markets are opaque. new short selling, reporting requirements were put into place this fall, and i would be happy to provide you with a full description of those and what else we are contemplating in a short sale area. as you know, we have a number of proposals out for comment. there's tremendous interest in those whether it is reinstatement of the uptick rule or a circuit breaker mechanisms to stop the decline. as a result of short-selling as opposed to lawn selling -- as opposed to long selling of the stock. the commission will be taking those issues up very soon. >> do you feel that each of you have enough authority to be able

to take a look at things that would be considered manipulative in that market? >> it is extremely difficult. the amount of data to sift through in these cases is overwhelming. for us, it is an issue of being able to acquire or avail the technology to do this kind of data analysis more efficiently than we do it now, so when we were discussing earlier about the rumor investigations and the potential shortfall manipulations, we have to review millions of trades in order to try to reconstruct what has happened, and it is my hope that the agency will have sufficient resources to do a better job with technology. i do not mean to make a pitch, but our technology budget is 50% below what it was just five years ago. it is really incumbent upon us

to have that capability. thank you. >> separate question on the shadow banking industry -- could you each comment a little bit on what you think the contribution might have been from the shadow banks to the financial crisis in its magnitude, and perhaps with different authorities or regulatory environment you think might have prevented some of the exacerbation of what we saw? >> i think the really poorly underwritten loans, the payment shock loans -- they absolutely originated outside the traditional banking sector. i think as market share cap being pulled away from depository institutions, i think it created - competitive pressure for the banks -- it created negative competitive pressure for the banks. but i do think the line share of it occurred in the non-banks

sector, clearly creating competitive pressures on banks. back to my point earlier about consumer protections, i think it in this in about in 2000 along with some strong consumer rules, applying it across the board, simply saying that you have to document our customers and come to make sure they can repay the loan, make sure income is sufficient to pay the loan when the interest rate resets -- simple rules like that we have now, i think, again in retrospect, they could have done a lot to stop them. >> to some extent, it depends on how you define the shadow banking system, so i would agree with everything the chairman has said, and i would just reiterate my concern about otc derivatives markets, the role they were playing, shadow markets for the regulators -- regulated securities options, and the ability to do in those markets what is clearly not

permissible in the regulated markets, or at least is invisible in those markets, even if it is not permissible. >> would it be possible to get a summary of what you believe to be the institutions that are part of the shadow banking system, and also the ones that may be outside of your jurisdiction? >> a share -- sure. for example, there are questions about money market funds. they are highly rated entities, although they are not part of banks, although they are important parts of the financial system. we could certainly try to divide the world that. >> that would be terrific. thanks. >> thank you very much. you have been asked to provide a lot of information. you have been given a lot of work to do coming out of this meeting. i do want to add one additional

requests. i do think for the commission, this impact of this april 2004 decision, with respect to lever's limits at the broker- dealers, and how that affected the bank holding begin or the investment bank holding companies, i think the clear explication of that in writing would be helpful because i still think we want to see exactly how the lifting of the limits on the broker-dealer, what effect that had on the overall entity. >> i would be happy to do that, and to be clear, the actual leverage limitations were not changed. it was really in how the net capital was ultimately calculated at the broker-dealer level compared to the holding company level, which, as we have discussed, is not subject to any regulation until 2004 or any capital requirements at all. we would be happy to provide the very straightforward description. >> and the difficulty partly is that when you have one that was

not regulated and one that was, you put them together under the same structure, the shift, and in explaining all of that, how did we wind up with, i assume, a good many people in structuring something for something positive was what we got, and i think we are really driving this. i think we want to get a sense of whether that was a critical decision, and whether that, in fact, did increase the risk profile of these entities and that subsequently collapsed or might have collapsed but for extraordinary governmental assistance. thank you for your testimony. we will take a 10-minute break and start promptly at 11:55. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> here is what is ahead on this martin luther king day. next, the latest update on relief efforts in haiti and a discussion on violent extremism. later, a look at the future of al qaeda.

>> join us later for live coverage of the new virginia governor in his first state of the commonwealth address. we will have that for you beginning at 7:00 p.m. eastern here on c-span. u.s. house returns tomorrow afternoon at 2:00 eastern for a debate on a number of bills to related this week, legislation to let the nation's helping keep the earthquake victims count on 2009 tax returns. the senate meets on wednesday, and they will begin the start of the second session of the 111th congress. you can see live coverage of the house of the senate on c-span to. this week marks 11 months since president obama sign the recovery act into law. more than $315 billion have been committed to states, which is up $2 billion from last week, but $167 billion had actually been paid out for stimulus projects. you can read more on c-span.org.

some new pictures of relief efforts in haiti. united nations officials say more than 73,000 people in haiti have receive food to last a week, but many more still wait, and even people whose houses survive are often living outside because of the fear that unstable buildings could collapse in aftershocks. the european union says about 2000 people may have been killed in the quake. -- 52,000 people. haitian officials say about 70,000 bodies have been recovered so far. >> [inaudible]

>> as relief efforts continue in haiti, a portion now from a briefing earlier today in port- au-prince, which is the capital of haiti. off we will hear from the head of the u.s. embassy and the commander of u.s. forces

carrying out earthquake relief efforts. due to technical problems, we are only able to show you about 20 minutes. >> since we are all sharing one microphone, the easiest would be if you have any questions for me about the role of the american embassy, if you have questions about our coordination with the government of haiti, the priorities that have been established by the government of haiti, questions about our relationship with the international community or with united states ngo's working here in the country, i would be glad to answer those questions. the general would be glad to answer questions about how we are getting foreign assistance out, how the food is being delivered, and be glad to talk issues of security, about security issues on the united nations, how the united states military is performing, and what their footprint is in the country, and obviously, we are glad to take any questions. that would use it and getting

american citizens out of haiti is equal to helping the haitians? >> that is correct. we have three priorities. what is rest and recovery. we have many teams on the ground working rescue and recovery. what is getting citizens back to the united states, and the other assisting in supplies. three jobs have to be done concurrently, jobs that we cannot do one without doing the other. >> you do not think helping the haitian people is more important at this point? >> we are helping the haitian people. we are deeply engaged, and we are spending far more resources on providing assistance. those priorities have to go ahead. we cannot leave people. there is a very limited time frame in which we are able to get people out of line. we simply cannot delay at in order to do other things. -- get people out of life. >> what you think about the criticism that there are too many u.s. soldiers? vdot >> the president asked as from the beginning to come in

and bring all of the assistance that we can. this request was that we bring in people who have the ability to do the job right then, not two or three days or a weak london. the united states military has a great deal of experience. the united states military has resources that would take days to mobilize from or their organizations, so the united states military was brought in at the request of the haitian government very early on because i have the means to respond to this crisis in a way that other agencies did not have the immediate resources to respond. as time goes on, you are seeing more civilians and more coast guard, in, more involvement, so the civilian footprint is growing, but the united states military has a unique role that none of the other agencies in the united states have. >> [inaudible]

as you know, there are several mobile hospital units. [inaudible] >> do you want to address the security issues? >> we will address the security issue in just a minute. let me say very briefly before i take a couple of questions and pass it over to the general that some of these things are getting out. you have probably seen them behind the palace. we were able to get that team in there yesterday. some of those teams are

providing assistance at the embassies. we have an education. we have done surgery, so those things are not sitting on their hands. they are getting out as broadly as we would like because of some security concerns, but those teams are being used, and i are being used now. the general will address the security issue in just a minute. are there other questions on coordination with the local government? >> [inaudible] they do not feel they are doing anything at all. i wonder if you have any idea when the government is going to appear? >> let me say that from the very beginning, right after the earthquake, the government of haiti began taking responsibility for the search and rescue and for the recovery effort. within hours of the earthquake, even when the roads were still all blocked, three different ministers of the haitian government got on motorcycles

and came up to the ambassador's residents to meet within the very night of the earthquake to begin discussions on how the united states could play a role in providing assistance to haiti. that very first night, the ambassador was able to get through to the president, despite the fact that all of the phones were down. use the one who reached out to ask how we could work together to address the situation. the haitian government immediately set up over here near the airport at a police station that you all have either been two or probably pass, and location were donors to start meeting, recognizing that our phones were not going to work, that we would have to have face- to-face meetings, and the haitian government, and the leadership of the prime minister, that every morning. they met this morning with a full panoply of assistance and several ministers of the government of haiti to coordinate relief activities. the president himself has gone to the majority of those meetings. i have been at a number of them, and he always comes, so the

haitian government is -- has been actively involved since the beginning of the earthquake in coordinating with these donors in liaising with the united nations peacekeeping mission, and it has been the haitian government from the very beginning that has told us their priorities in addressing the needs that have arisen as a result of this earthquake. >> [inaudible] what kind of an impasse that had on coordination with everybody else? >> a loss of our colleagues was a very serious one for all of us. the united nations, however, brought in a very experienced diplomat. he has been here before as the representative of the secretary general of the united nations. he knows haiti well.

he knows the united nations system here well. he was able to hit the ground running. the ambassador has all of the skills to get them back up on their feet again, and to ensure that the united nations mission here does not lose a minute in responding to the crisis. we meet with the secretary general's representatives -- we met with him twice yesterday. we will meet with him a couple of times today as the crisis unfolds. the united nations was badly hit. they lost many of their civilians. they lost many of their peacekeeping soldiers as well. the brazilian troops that are laboring here heroically lost 15 troops and had many injured. other battalions have also lost a lot of troops, but the united nations is there. you see them out on the streets. the united nations is providing security.

the civilian leadership, which provides such a support for the government of haiti in in different ways -- they are there, active, present, and the leadership that they brought in is an experienced leadership that knows exactly what to do. let me pass this out to general keane, who will address the issues of what we're doing to provide assistance here in haiti. >> good morning. i and the deputy commander for u.s. southern command, and i would also like to reiterate to express our appreciation for the

international community and for all of you being here this morning. i want to start by saying we are here at the request of the government of haiti, and we are working in partnership with the united nations forces. we are doing that on a daily basis and coordinating extremely closely. i have known the commander of minister for nearly 25 years. we have worked together various times. they are doing an extremely exceptional job in carrying out their mission at this time, and we are working very closely with them under very difficult circumstances. as you know, the tragic effects of the hurricane are widespread throughout the city, and there were impacted directly as a result of that. i was here the night of the earthquake with the ambassador.

as soon as we could, i made my way at first light down to the united nations forces headquarters to try to link up with them. i was able to locate the cheapest gas and just get eyes on at the impact it had on their headquarters, so we are honored to be able to work with them, and each day, i meet with the general to discuss what they are doing and also share information on what we are doing. we are performing a humanitarian coordination center at the request and approval of the president, and the secretary general, and we will increasingly be able to coordinate and 7 as all of our activities to ensure that we are able to put humanitarian assistance where it needs to be as quickly as possible. with respect to the security situation, my assessment of the

security situation is it is calm at this time, as you have reported. there are incidents of violence. those who live and work here who have been here for years, both within our own embassy and the other international community as well as united nations forces, tell me that the level of violence we see right now is below the pre-earthquake levels. nevertheless, and the incidence of violence impede our ability to deliver humanitarian assistance, and we have to address those, as they are doing to the best of their abilities. we are focused on delivering humanitarian assistance supplies. yesterday was a very good day. yesterday, we took charge of one of four distribution points.

the government of haiti has designated four distribution points. we are running one of those. we have passed out water and crashed into medical supplies all their long as long as we have supplies at that location. we are coordinating and working with the general to take responsibility of those other three so he can focus those forces he has dedicated to that task right now in the area of security, and we will be focusing in the area of humanitarian assistance trying to expand our reach in to those locations you have so well reported on that are not getting support at this time. every day, we increase our capability to reach out. right now, we are principally during a coming of the u.s.s.

aircraft carrier. we will increase our footprint that we have here today, and we have about 1000 to 700 u.s. military. we will see that grow over the coming days. right now, we have approximately 5000. those others are operating from the ship's in support of the operations here. i anticipate within the next few weeks, we could attend thousand, of which only about 50% will actually be on the ground in haiti in direct support of delivery of humanitarian assistance, and the others will be operating from our ships in order to support our operations here. again, to deliver the humanitarian assistance supplies as best we can, in conjunction with the minustah forces as well as the international community. we are only one part of this,

and the international community has played a very critical role, as well as countries such as canada, which has a role in forces, and it will be supporting in areas we have not reached yet, and we are very appreciative to partner with each one of those, and it truly is a partnership with us trying to focus our efforts in the area of humanitarian assistance, which allows minustah to continue the great job they have done for so many years in the area of security and stability. then what does this imply that the u.s. will be taking over the aid effort and coordination? no, -- >> no, we are in support of the government of haiti and the united nations as it relates to humanitarian assistance. what we want to do is use our resources as best we can to enable the humanitarian

assistance supplies to get out to the points i indicated. the formation of a humanitarian coordination center, where we all will be part of, but it will be shared, if you will, by the government of haiti, and we will take our directions on priorities based upon what they are designated, we will execute those as those priorities are set, and we are working in partnership with the minustah forces, obviously enabling them to continue their job of security and stability while we are able to do that. the more we can do in humanitarian assistance, the less resources they have to dedicate in that area, which would take away from their ability to do that. i met with the general on a daily basis, what he is doing in that area is in my view what is necessary. he has got forces throughout the

country. he has taken measures to ensure that he is able to continue his role in the security and stability in what i see is his ability to exercise that, as he has done in the past. >> what is your response to complaints that the u.s. comptroller of flights coming into the airport has actually prevented some of the aid relief flights from getting in? secondly, why do you need so many troops on the ground? >> i will address your second question first. as i said, we need as many troops on the ground as we can, and we have identified that those numbers based upon our assessment of trying to reach -- you have been around the city. there's over 3.5 million people here. it is a very congested area. in order to get to all of the points that are needed in order to address the situation, we need a number of troops to do that.

>> why does it have to be soldiers? >> that is what we have, and that is what was available to immediately deployed. in order to react immediately, we had that capability -- not just "we" the united states, bought also canada. minustah on a dime change many of those resources that were dedicated to security and stability to humanitarian assistance because that is what was needed immediately, but that was a change in their focus from what they were doing to what they needed to do following the earthquake. >> here is what is ahead on c- span -- coming up next, a discussion on violent extremism. and, and look at the future of al qaeda. later, new jersey gov. jon corzine gives his last state of

the state address. join us later for live coverage of new virginia gov. bob macdonald -- mcdonnell and his first state of the commonwealth address. we will have that for you beginning at 7:00 p.m. eastern. tonight, the head of the communications workers of america on what the role of the federal government should be in expanding high-speed internet in the u.s. and a look now at violent extremism with a special focus on al qaeda recruitment efforts from today's "washington journal." this is about 45 minutes. venhaus is the jennings house army fellow. he was in charge of targeting and assessment in afghanistan. he is here to talk about how

young men become extremists. what is the number one factor in a young man becoming a muslim extremist? guest: the most important thing we need to understand about how these young men are attracted to an extremist movement is it starts early. there are some myths, that is economic, has religious factors, but you have to look back at their bases of what they desire as they come of age, as they start to define themselves. the search for identity. who am i, as a person? the search for that vector-less energy makes it possible for the

base of what a young man feels, to make al qaeda appealing, because he does not have other choices. host: we are not talking about women being recruited are we? guest: not as much. there are a very limited number of young women involved in al qaeda. if the primary reason of that is not necessarily because they have different motivations but they have significantly different opportunities. all lot of these young men find themselves isolated in a society that they do not understand, that does not understand them. with travel limitations on women, it is hard to get away from their communities can be isolated. it is harder for them to feel like they are a fish out of water.

-- communities and be isolated. host: colonel j.m. venhaus is with us until 9:15 the stern. democrats, 202-737-0002. republicans, 202-737-0001. independents, 202-628-0205. we will get to your phone calls momentarily. since 2001, how has al qaeda's recruitment effort to change? guest: the most important when they have changed is the way have redefined itself as an international brand. al qaeda is much less of an organization today -- structurally -- and much more a

brand identity. it is almost like a product brand, a brand that people want to belong to. some people say that al qaeda's greatest strength is its myth. it does not recruit so much that it creates a brand where people look to it and say, that is what i am looking for. i was confused, i did not know who i was or how i fit into the world, and this seems to be a great explanation. it is a sense of belonging. al qaeda is a great group because they provided that, the benefits of membership into something that gives you prestige. al qaeda has gone from being active on the street-type of recruiting to creating a brand,

creating something that people can aspire to. host: in terms of personalities, the flight 253 subset -- suspect, abdulmutallab, he was close to a nobody. is that typical? guest: absolutely. he is a young man searching for something. he does not understand how he fits into the world but he wants to isolation is a huge factor.

-- but he wants to. isolation is a huge factor. host: but there are plenty of young people who feel isolated. what is the step in between? guest: opportunity. if i am a young man looking for a group to belong to and there are 10 groups, i could choose any one of them. if i am a young man who is isolated, looking for a group to belong to, and all that is presented to me, or the most appealing thing is al qaeda, then that looks like the best choice. some people say that if you have a hammer, everything looks like a nail. well, if everything around you looks like a nail, then you are going to act like a hammer.

it is not unlike youth gang violence that we see here. it is not that these young people are fundamentally different from other young people. it is that they did not have the opportunity to find some other outlet for belonging. host: next phone call. caller: thank you for taking my call. i wanted to address one aspect of compensation that has been missing. when you think about how to 80% of the world's resources goes to america, you can understand how people in those areas become disenfranchised. they are not able to benefit from the resources.

when there is a small minority of the world's population that creates -- controls the large majority of the resources, that is a problem. i do not want to focus specifically on al qaeda, but thiere is different -- disenfranchisement around the world when they cannot even use the resources from their own land. that is what makes people mobilize against those invading forces. i think that is in large part of the problem. a small minority of the world's population controls the large resources of the world. host: thank you.

guest: i think you hit on one of the myths myths associated with recruitment. what we have done is study about 2000 young men who had come to extremism. . . into a and extremist organization and try to trace back word to the point where they made the decision to join. they learned about exploitation of resources and they learned that tens of disenfranchisement that we talked about throughout the process. that was not what drew them in. you have to go further back in their development to figure out their development to figure out why they joined to know what motivated them to look for something. once they walk into a mosque and a hear about jihad, they get a

lot of information about the world that they did not have. a lot of it is skewed. but that is after they made the decision to cross the threshold. that is not the motivator that got them to the front door. so the exploitation of the world's resources is an argument used by them in the indoctrination process, but it is not so much a part of the recruitment process. host: s.i.. -- staten island. caller: thank you for your service. i keep on hearing the term al qaeda. are they the only extremist group we have to be concerned with? is it also not the fact that

this is a conception of the policies that we have? for instance, iraq. is it not possible that some of them -- even if i do not agree with their actions -- [inaudible] guest: other than al qaeda, yes. there are lots of associated movements. all data has become more of a blanket term, not necessarily for any specific organization, but for that brand that i talked about. the violent extremism rooted in ideology that goes by several names in different places. in many of those other places,

any of the other associated movement, the adult -- ideology can be the same because the appeal is the same. the escalation of status, sense of belonging to a group that they find in these kinds of groups. in some cases, as we saw with porticoed, -- for food, people who have never been associated -- fort hood, people heawho have never been associated with a group. in terms of our policies, do they turn them against us? in some cases, yes. some people in the world are against that, and because of that, i want to speak an angrily

about that. what a change in policies change the fundamental nature of the argument? not entirely. there would still be people willing to speak angrily against the policy. host: a skeptical view from one of our viwerewers -- as she underestimating al qaeda? guest: she is alluding to the fact that there is a change in the way al qaeda operates. when al qaeda was a network -- a part of the movie had been -- mujihadeen network, it is a

different al qaeda that directly threatens the united states. it has made statements since that time in afghanistan when it was referred to as freedom fighters on behalf of the afghan people, made statements about its global operations. it has gone from localized movement with a political cost to a globalized movement with a completely different political cause. host: colonel j.m. venhaus. maryland. republican line. caller: i think when there are a lot of young men with nothing to do, they will find something to do to get them in trouble. don't you think employment is a problem?

guest: what i found in the men that i studied it is the vast majority of them came from middle-class and upper-middle- class upbringing. unemployment was in frequently cited. went in, i thought the same thing. the truth is, more often than not, they are employed. i read an interview with one of the saudis who crossed over into iraq who said i was about to get promoted in work, but it did not fulfil the, so i look for something else. i think the basic motivation is more about what he was looking for them it was about having a job or not.

there was talk about al qaeda promising money to fighters. when someone makes a decision to leave their jobs, their home, a relatively peaceful environment, toward the conflict zone, almost never is it because of the pay. suicide bombers cannot get paid well. it never has. when you talk to the young men who joined the cause, they are not looking for money for themselves, their families, or anything like that. it is, i had no meaning. can you get meaning and fulfillment from a good job? of course you can. having any meaningful job is more important than just having a job. when you look at the countries across the middle east, where

the foreign fighters are drawn from, we see unemployment rate that vary from 2.2%, all the way up to 40%. those statistical correlation between unemployment and the number of foreign fighters that that country generates. statistically, the data doesn't support that. however, having for unemployment conditions in a country that to the argument. host: you mentioned those 2000 individual that you studied. is this part of your work with the u.s. institute of peace? guest: yes, this is work that i started in the centcom region. that was followed up by a collaborative effort by the u.s. army war college.

one year of fellowship where i can take my field experience reviewing the information about born fighters -- foreign fighters, with a year of intensive study looking into more cases, more information, and as we see every day, more and more opportunities to study that. host: is this the largest study to date of radicalization? guest: i have benefited from a lot of people who have done great research and similar studies in radicalization. i do not know if this one is bigger or if i have just compiled a bunch of them together. for me, the benefit is, before i had to do academic research, i have to do military research that gave me access to

information that is not money available to academics. i was able to look at classified reports as well as on classified data that came out from academic research. my sample size has benefited as a result but i cannot say that mine is the biggest or the best. host: you have also done research on the issue of child soldiers. how big of a problem is it, what countries specifically have this problem? guest: one of my distinguished colleagues at the institute of peace the some great work about children in conflict zones and how that prevents them from reaching adulthood. the complex around in -- conflict surrounding a young man is fundamental to his outlook in

the world. we approached the research from two angles. you look at young men in conflict zones, what it does to them, and i am looking at these young men of sign of conflict known to seek them. child soldiers it is a significant problem. they mostly stayed in their home countries and become a problem for their home country. host: cold water, michigan. pete on the republican line. caller: i have a couple of questions. i wonder what the colonel had to say about people who say the u.s. government was involved in 9/11? guest: i do not believe that.

simply stated. the 9/11 commission published an excellent report on that. people say a lot of things that i do not believe. host: have some of those views been expressed by these individuals that you have studied? guest: yes, there has been some amazingly skewed views which complicates the facts. we would go around to these afghan villages and show them a video to show them, this is why we have come. it amazes me sometimes to see people look at the video and say, that cannot be real. why not?

because you cannot build a building that tall. they understood airplanes, explosions, they even understood a little bit about america, into a degree, they understood what hollywood was. that must be hollywood because you cannot build a building that tall. that is a comic example of a common phenomenon that exists. they have been made to believe, that information that is simply not true. but they have been so encased in an isolated environment, completely immersed in a belief system, that it deserves reenforcing. if everyone around you believes something, you have to start to agree or you will not be part of

the group. what you want is to be part of a group. as a teenager, you want to identify yourself, be a man, like these guys. these guys think the margins did it, so you will probably start to begin that. if you do not start to believe that, you will have to leave the group. the detroit number talked about loneliness, not having any friends. once they are in a group, it is easy for them to keep feeding from that negative, and in some cases, false information, and come to believe it is the truth. host: madisonville, ky. go ahead. caller: one thing that no one has mentioned -- and i know people do not want to attack a whole religion -- but there have

not been any norwegians lutherans doing this. what is the impact of radicalized islam and the preaching of the radical mullahs? we have had a few timothy mcveigh-type of nutcases. all of this is coming from islam. i want to hear what you have to say about that. guest: that feed into one of the myths that this is caused by religion. we looked at these guys, and overwhelmingly, 80% of them came from limited religious education, and they grow up in a house that was observant but not dominated by islam. there are some people who did not know much about their religion, where it is practiced,

but not overwhelming. if they were lutherans, name mty be the christmas and easter-type of people we see. so they get these nuggets of radicalism put into it. these guys would have benefited from more religious education burleigh, as opposed to less, because that would have created less intellectual wiggle room. the other thing about religion, as it relates to my study is, religion is a fuel that can identify just about anything. look at the relief effort in haiti. on the usaid website, you will see that muslim charities,

christian charity, jewish charities -- just about any charity in the world -- is working side-by-side for good. all of those religions can support a belief that you ought to help your fellow man. each of them can also point to a time in history where it supported violence. the fringe element, the radical, skewed element of a religion came to the four and a sanctified violence on behalf of the religion. so religion is not the cause some much that religion is the accelerant. it pushes people in one direction or another. it is long were the cause, then there would note -- would not be any muslim charities. i see a lot of people on both sides of the argument using a

dozen quotes out of 1000 pages of a religious text to say that that is what it is about. anyone who does that can make say what ever they want. but to label a religion, this is a religion of peace, that is a religion of hate, and so that religion should be banned, the other should be promoted -- that is misguided. the 2000 terrorists and i studied, they would not have been any different if they had a core religious upbringing in the launching a radicalized person to answer that skewed version in their head. host: north carolina. larry on the democrat line. caller: thank you. we have people on both sides.

look at what pat robertson said about 80 the other day, that they were cursed. we have extremists on both sides. -- haiti the other day, that they were cursed. the question i want to ask the gunman, someone had called in before -- and gentlemen, someone had called in before to say that 9/11 was an inside job. even the guy that they arrested in the philippines said that they were going to use airplanes. i wanted to ask, do you think that they said this will happen and we will let it happen so that we can go to war? . .

said speaking in an eloquent, often colloquial english, he and other imams offer a

televangelist persuasive message of faith, purpose, and a way forward for both the young and uncommitted and worshipers hoping to take the next at 2 g hiatt, officials say. specifically his role, but more broadly these imams. guest: their radical views out there. that one is probably one of the more effective ones because of his command of english and some other things that allow him to tap into young people who are frustrated. and i think the more we learn about them, the more we find that major hasan, a 39-year-old college graduate, dr. at fort hood, was very much like this 23-year-old nigeria going to school in london and that most -- both were isolated, and slid it, and confused. they did not understand how they

were supposed to fit in the world so they look for something. ok, what we present as a competing narrative? how do we present something to them that is an alternative if they are both looking for something. they did not know what they're looking for when they set out to find it and i found is radical and he said, let me tell you, i have the answer. i have the answer as to why you feel lonely, why you don't understand your place, what you could do to give your life meaning. and they said, ok, that's one version. where is the other version? they did not hear anything. they said, well, that is the only solution i have been prevented or that is the only solution that i can be comfortable with in terms of my culture and my upbringing. culturally attuned, culturally sensitive alternatives to the al qaeda message will go along way. to changing the way these guys

approach al qaeda. host: specifically on major hasan, there is a headline. should the army have done a better job seeing some of the signs? guest: i have been in the army since 1982. there has not been anything we have done where we did not look back and say let us see how we could have done it better. that is how we have become the army that we are today. that is how we will be the army we are going to be in 2050, is looking at everything we do and say, we could have done that better. as we look back and say secretary -- the commission figures out exactly what happens, as a learning organization, and the army is going to say, we can do better. we can do everything better. in this case, we are going to find things that we should have, could have done better and in the future we are going to do better because that is the kind of organization america's army is.

it's a learning organization that looks at every event as an opportunity to get better. host: michigan, gerald on our independent line. caller: i would like to s may be three questions. how, a al qaeda, they are not soldiers, they are guerrillas and they should be treated as such but they are not, they are being treated in civilian law. is it constitutional to use national guard as regular soldiers instead of using a regular soldier? why aren't the soldiers in correa rotated -- korea rotated with people on duty in afghanistan and other parts? guest: in terms of seeking a definition for al qaeda fighters, whether they are al qaeda soldiers or guerrillas or

criminals, or whatever title you want to put on them and whatever resultant procedures and policies in place -- criminals being handled in law enforcement channels and prosecuted in civilian courts or enemy combatants, their arguments on both sides. there are good arguments on both sides of that debate that don't matter to the young man who decides to join. he does not look at it and go, i want to be an al qaeda soldier or guerrilla or commit an international crime. in many cases, they look at it as an opportunity to do something they are looking for -- long-term organization they want to belong to, and how they are defined by us is not a significant impact on how they are recruited. how we treat them -- competing

policies and thoughts. some great work and studies have been done into the way the british government treated the ira in the later stages of their conflict in northern ireland when they went from being treated as lawful, that needs and later treated as common criminals and what lack of status that gave them as an organization, just a crime syndicate as opposed to a freedom fighting movement. so there is some legitimacy they were able to draw from being considered soldiers in a glorious fight and some negative the sides of being a criminal elements. on the other hand, there are ways that they can consider themselves to be outside of military activities that give them other benefits. there are compelling arguments to be made on both sides. as far as the national guard, i

have been privileged in my career to serve overseas on multiple occasions and have never found myself to not to be with other members of the total army -- the army reserve, the national guard, the active duty army, marine reserves, airmen, sailors, soldiers, coast guard men -- from citizen soldiers in the guard and reserve to full- time active duty. what i found this, they are all out -- including the ones who are spending a brief period of time in their careers overseas in korea and then finding they go from korea to a conus station and then deploy from the united states to iraq and afghanistan. that has happened as well. they go from an isolated court in korea where they don't have their families -- family with them, back to their family in a post in america and find out

there in it is going to iraq and spend another year without their families. so i think the policies and army in terms of rotation and getting everybody in the fight, there is more than enough to go around, being spread around pretty heavily. host: you are here in washington now. where do you hope or know your next assignment will be? guest: i am still waiting on the army to tell me how i can best serve the needs of the army. if that is in afghanistan, taking the research i have done and putting it into practice, if it is in the pentagon, taking the research i have done and knowledge i have gained and putting it into policies that allows the people in the ground to do better -- the great thing about being in the army, they will let you know, but they will not rush to tell you. i will know what my next assignment is going to be probably in april and be headed that way in june or july.

bono's? it could be any one of the number of things. but i will get a job that lets me make it easier on the good guys and hard on the bad guys where i'm. host: memphis. greedy, on the republican line -- grady on the republican line. caller: i wanted to ask him -- even in the urban cities of america, you have a gang problem. of the male, the father figure. how did this affect what i have been hearing this morning? something that we could look at. leviticus 25, i never thought

about it. host: we will get a response. thank you for the question. guest: the absence of a male role -- role model is one of the many things that makes the problem of youth gangs in america similar to the problem of al qaeda recruitment in the middle east. there was a great article this morning in "the washington post" about a taliban suicide bomber that was thrown out by his father. he came back to the village where he had grown up with explosives and blew up his schoolmates and friends that were outside playing volleyball. to me that encapsulates the entire phenomenon. rejection by the father, a son in isolation and insulation. combined with a bottom line that says that you need to you. do somethg

and on the other side, the competing theory. all of the young men who lived in that village could have gone either way. and some of them had the opportunity to join a dues volleyball league that was well supported. the reason why it there were some deaths when that bomb went off was because the whole town had turned out to watch young men play volleyball in this new volleyball league that was there to give young men and outlet, a sense of belonging, a team to belong to. and one guy who had gone off and joined another team came back and he was the catalyst to destroy what had been bilked on the positive side. so you have the absence of a father figure, it figures prominently in some of the lives of these young men, even if it is just distance from their father. host: foreign policy magazine writing about the five men from

northern virginia, how al qaeda do $6. it says, these men fit the profile -- no profile at all. not it age, race, culture or education -- anyone can join or be adopted by the al qaeda network. the only prerequisite, willingness to accept the radical ideology. if there is a lesson to be learned by the recent arrests is that profiling will not work. we need something better. what would that something better be? guest: something better would be an emotional and psychological profile as opposed to physical and democratic profile. the come from economic pact -- all the economic spectrum, education spectrum, age and location. they share in common the sense of isolation, disenfranchisement and lack of belonging that those five young men exhibited that was not unlike what farouk exhibited

before he decided to go bomb in detroit, some of the hard core central al qaeda, or 9/11 bombers, or others experienced. to physically profile them or demographically profile that is very difficult because they are all over the map. go further back in their development and cognitively, psychologically, emotionally they are very, very similar. host: pennsylvania, wilkes- barre. caller: i had a question of -- maybe they feel threatened in the foreign countries when the military moves in, and if the foreign troops would come into your home with their family and yourself feel threatened at this point and try to protect what you have, and would you expect yourself and your kids to may be stand up for what you have there? guest: i believe that the way

our military bases overseas, the way that the government approaches its citizens has a lot to do with those citizens attitudes toward the government or toward the military. so, absolutely, i believe that its soldiers come into your home and kick in the door and not all the chairs and speak angrily to everyone in the house and start ripping and roaring and tearing things up, you are going to like them much less when they leave as opposed to when they showed up. but if they come to your home and they sit with you and talk with you and i understand you and they get to know you for who you are, then when they come back the next time, they will be warmly received. and they may be warmly received with information about the people there looking for in the first place, the people that are doing bad things in the communities. absolutely.

our approach to the population has to be one of dignity and respect. we treat everyone with dignity and respect. i think that is a hallmark you are seeing throughout the theater now, is that you are seeing people treated with deputy and respect and you are seeing people respond similarly with dignity and respect. it is going to take time. but you see it happening in afghanistan and you see it happening in iraq and just about everywhere else. host: you are doing your fellowship of research at the institute of peace. can people read your work online? guest: american samoa yes, some of its posted online. we have a public event tuesday. there are a lot of great resources. a lot of wonderful things been at the institute of peace is the access that i have to some truly outstanding professionals and academics and researchers in the

field who have studied conflict and conflict resolution fore)ár@ we have base -- this is hosted by the carnegie endowment for international peace. just under one hour 15 minutes. >> good afternoon and welcome. i am excited to talk about this fast growing topic, something we have not had much focus for attention on so far. jerrick is going to speak first, for about 15 or 20 minutes.

and then brian will give us some comments. jerrick teaches about counter- terrorism and what not. he is the author of "global jo ihadism." brian is the director of research at the combating terrorism center. we are excited to have him as well. so, jarrett. >> thank you, everyone. i know that fargo, north dakota is a hot bat -- hotbed of counter-terrorism research. we are actually trying to make it that way. that is my home town. this is a heat wave here, it is 45 below back home. we have been talking about this

for a long time. chris and i had been talking a lot about who he is and what he represents. i started bringing this up in 2006. we will get into it. being put out on peripheral organizations, he was in no one. i think that people thought that he was a curiosity, one of the four that spoke more. by 2006 it became clear that this guy was different, fundamentally, than the rest of the al qaeda boys, the talking heads. i started saying that he was a pundit, a warrior, a scholar, an

artist and what ever. i got some criticism. the first was a critique of my metrics. if everything i have is a hammer, all are our nails. as an intellectual, all i saw were budding intellectuals. other people challenge me, asking if i was amplifying him by praising him as much as i was. a constant struggle that we face in our community, trying to assess their importance without giving them the credibility that they need. they cited a report that we worked on as proof that he was still the most important thinker in al qaeda. which is weird. there are a lot of post-modern twists and turns to the al qaeda

media strategy. in september of 2008 there is a video featuring a guy, and what got my attention -- you see this low? d.c. something else in this video? there is a coffee mug on his desk and has the local media logo on it. i thought that was strange. why would they put their logo on a coffee mug and feature it on the desk of their leader? shortly thereafter you saw them giving a talk with a microphone that had that logo. there are two things. one, they have adopted their media organization low as their

official logo. two, they imagine themselves as a new al-jazeera. i have been arguing for some time that al qaeda has transformed from a global terrorist organization to a media organization that uses terrorism. i think that the pendulum can swing back and forth, but there is a fundamental transition, around 2005, when the al qaeda senior command was completely marginalized in afghanistan. they had to figure out the -- how to make themselves more relevant. they started talking more. in 2005 we lose custody of three of them. it was a great escape and the

detail it minute by minute in a video series. they've been published the transcript in english and arabic. this is the stuff that movies are made of. these guys are hiding in sales of wheat. there are traversing at night with airplanes flying over. somehow made it out, somehow they got to cobble -- kabul and passed back to al qaeda. he had a long history of being involved in this kind of activity. one of the things that was most interesting, the first was that he was a libyan. the polehinke is in his late 30's to mid-40's.

he was a fairly awful student in college. he was very interested in science and engineering, as well as studying categories, seeing how things fit together. you can see how he enjoys puzzles. eventually he joined up with other groups to get formal religious training. this is something that people debate in my field -- al qaeda has never been clear about the extent of his formal religious training. i think that he has got the most religious credentials of the talking heads we have seen. he has become the jurors provincial police chief for al qaeda. he was called their sharia pit bull.

he keeps them in line through a religious standpoint, coming out second most rabidly against other prominent hottest. in 2005 we have come to understand who he is thanks to al qaeda media. like s. said, he was not featured prominently in their media organization. so, one of the things that you see is the making, arguably, of his brand. think about any corporation that tries to brand a new product. it has to be rolled out. starting late in 2005 you see him firing guns, getting out there with the wind in his hair,

people hanging on his every word. he is a fighter, a romantic. he is publishing some of his poetry, his essays. this is comprehensive. this is not someone who just went out there to kill. he was on the council. he is a thoughtful, smart, religious man, as he is being painted. you see him sitting there with a person flanking him on his right side, this is someone i had not even thought of. it turns out that he was being groomed. he has served as their lap dog.

so, you start to see him in these various poses. everything comes to a head in november or december of 2005. as you know, three letters were written. one was published by the combating terrorism center, it was a desperate plea for money and information. al qaeda was saying that we know you are doing great things in iraq and killing a lot of people. could you stop that? by the way -- i have written a lot of books and am very important. you know, we feel irrelevant, send us a couple of hundred thousand dollars. but he had no interest. he kept going.

in november that published a direct letter of mine. here are a few things i need to remind you of -- he gives a lecture to al-zarqawi. first of all, you kill too many people, you are getting too loud and ambitious. he does not come out and say that this is what your doing, but he implies it very heavily. he said to be careful who you surround yourself with. this is a theme that we see throughout the riding. then he surrounds himself with the similarly thoughtful people.

he says that communication is the key, explain to people why you're doing this and how you are doing it. this was pioneered by modern jihad leaders. then he talks about the importance of doing things sequentially. that there is a right path . this letter, sent in concert with another letter from another libyan that is a partner in crime, seems to be able to get him to back down. we have months of him escaping, being in no name guy. so, the one that was actually up to something, was being lectured on how to do his job.

which is fascinating. 2006, you start to see his official media. what do you see behind him? laptop and a rifle. this is important. everything that they do in their videos is critically symbolic. they're reminding you that in 2000 he was a web master. in 2000 i was still trying to figure out my e-mail, but he was innovating. youthful, charismatic. people respect him. he is being branded as the man for the new millennium. this is an important step.

you start to see just what he is capable of in 2007. so, i think that some of the most important contributions are the ones he has made for al qaeda. he becomes the religious mapmaker. in the sense that he is mapping the photography of global g. todd. these movements have historically gone awry because they have not got off on the right half. he is when the make sure that everyone stays on the path and he has been very aggressive against the mainstream. you can call him a religious police man. he is obsessed with religious purity. his argument is that islam is being diluted from within.

using the word resistance instead of jihad. anytime that you embrace the concept like that, he says you are introducing a trojan horse the allows the west, the rand corporation, specifically, to take over his farm from within. mainstream, moderate islam is a fabrication. democracy is nothing more than a ruse. so, he spends most of his time trying to point out when there are semantic insurgencies. the irony is that he has embraced the same approach. he has spent a lot of his writing identifying religious concepts and trying to get them of meeting -- meaning, replace them his own meaning, and philip back up from the inside out.

you could call him the cheerleader-in-chief of the global chief of. -- g. hud -- jihad. he will write thoughtfully about and where were they are not receiving attention. he is also the best investigative reporter. he is always the first on the scene when it comes to intellectual issues. how much more time to i have? a few more minutes. ok. let me show you a bit more imagery from the early videos. he has to get his operational credentials check. he gives a sermon at the end.

this was fascinating. this was a photo shoot released by a ham teaching in a classroom setting. it is important, i think, because every one of these is put out for a specific reason. showing that he is relaxed, a man of the people, humble. he is the kind of general that will come down and walk through the camp. that is very heartening for a lot of people on the internet. they want to be one of his guys sitting around. this was an interesting photograph, a man making a bagel, which we had a laugh about, but for those of you who

know -- the fact that they have obscured his face, they did not show the great general of al qaeda. they let you think that he might have been the guy, but they did not confirm. this was replayed in a recent video where, after his talk people came up to hug him and you see this intentionally blurring out image. who are you left to think that this might be? would osama bin laden actually attend the speech? who knows, they do not confirm or deny it. there is this consistency to his videos where someone, he or his handlers are trying to make you think that needs to be taken

seriously. the one i will concentrate on here are the issues of shielding. in this when he talks about the ability to kill another muslim. he spends the first 20 pages of this essay calling out justifications, saying it is ok under these circumstances if the west or your adversary has used other muslims as a human shield. then he says something that embodies all of his writings, he rejects the presence -- pretense. he says that the nature of the warfare has changed and therefore, everything i just wrote about that constrains our ability is irrelevant. he wipes the slate clean in terms of limitations on the al

qaeda ability to do what they do. he suggests that he is the one in the position to rewrite it. weaselly all of his statements have been compiled and put out. i cannot tell you how popular he is on the al qaeda forum's. not only does he approached criticism by rejecting the premise, but he will occasionally increase the ante. al qaeda came under attack for killing muslims in a jury of. he rejects the presence -- pretense, saying that they're not even muslims, the they were apostates. then he says they will kill -- more of them and says that you should as well. saying that if you are not, you are not doing your duty.

he does not try to tiptoe around criticism, he embraces it and turns it back on you, tripling it. that is why the movement loves him. he is tough, macho, he has every box checked from the perspective of al qaeda. so, i will stop there and let chris asked me why he gave us six strategies for how to defeat al qaeda. >> first, i just want to thank christian for having me up here. we have worked together for a long time. in general, he is spot on,

right, his position makes him a unique leader, as the because he has been positioned as a religious leader, a cheerleader, and on the ground commander. the other thing that makes him interesting is that al qaeda has changed. we frame this talk in -- around the notion of who the next osama bin laden will be, but now i am rejecting the presence -- pretense. the next osama bin laden and not have that much in common with him. it is worth looking back to ask what brought him to the forefront. looking at a variety of things, the most important is circumstance critically, in that

time after the anti-soviet jihad, he had finances that allowed him to separate himself from others to provide the backbone for a wide variety of organizations, but he could be a touchdown for groups that were operating all over the place, even if they were doing so independently. i think it when you look at al qaeda today, it is operating very differently. talking about them as a media organization, swinging back to being a terrorist organization, when you look at the way that they are organized today, they serve as a media organization and a consulting organization.